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 92-03
It is a common practice for a single lawyer to handle a real estate closing. The lawyer may represent more than one party to the closing. It also is a common practice for the lawyer to act as agent for the title insurer which is issuing a policy of title insurance protecting the interests of the lender or buyer or both. Typically, the lawyer receives a commission from the insurer based on the amount of the policy.
Question:
May a lawyer who represents one or more parties at a real estate closing also act as agent for the title insurer that is insuring the interests of the lawyer's client?
Summary:
A lawyer who serves as attorney for one or more parties, including the buyer or lender, at a real estate closing normally may serve also as title insurance agent. However, an impermissible conflict is possible when the lawyer serves in both capacities, and, at the outset of the representation of the buyer, the lawyer must advise the client fully of (i) any potential adverse impact on the lawyer's professional judgment caused by the lawyer's duties to the insurer as its agent or the lawyer's own financial interest in receiving a commission, (ii) the availability of coverage from other insurers, and (iii) the opportunity to seek independent counsel. The lawyer should remain alert to circumstances in which the interests of the insurer or of the lawyer may interfere materially with the representation of the client, and, in those cases, comply with the requirements of Rule 1.7 (b).
Opinion:
The practice of a lawyer acting both as attorney for the parties at a real estate closing and as agent for the title insurer raises a number of potential ethical concerns. First, is there an impermissible conflict under Rule 1.7 of the South Carolina Rules of Professional Conduct between the interests of the buyer or lender represented by the lawyer and the interests of the principal title insurer? Second, is there an impermissible conflict under Rule 1.7 or Rule 1.8 between the interests of the buyer or lender represented by the lawyer and the interests of the lawyer who receives a commission as agent of the title insurer? Third, do the multiple roles of the lawyer as attorney and agent create the risk of improper disclosure of protected information in violation of Rule 1.6? Fourth, is there an impermissible sharing of legal fees with a non-lawyer in violation of Rule 5.4? This opinion will address each of these issues in order.
Conflict Between Interests of Client and Insurer Rule 1.7 (a) prohibits a lawyer from representing a client if the representation will be directly adverse to another client unless it is reasonable to believe that the representation of the second client will not affect adversely the relationship with the first client and both clients consent after consultation. Whether a closing attorney who serves as agent for the title insurer serves also as lawyer for the insurer is a question of law beyond the purview of this committee. However, it appears that service as a title insurance agent does not ordinarily create an attorney-client relationship between the lawyer-agent and the insurer. Absent specific evidence to the contrary, therefore, this opinion is based upon the assumption that the lawyer-agent does not serve as legal counsel for the insurer. If the insurer is not a client, there is no conflict under Rule 1.7 (a).
Rule 1.7 (b) prohibits a lawyer from representing a client if the representation may be materially limited by the lawyer's responsibilities to another client or to a third person, unless the lawyer reasonably believes the representation will not be affected adversely and the client consents after consultation. As agent for the title insurer, the lawyer clearly has a fiduciary duty to the insurer. The threshold question, then, is whether the lawyer's representation of the lender or buyer as a client may ever be materially limited by the lawyer's simultaneous fiduciary obligation to the insurer-principal.
In discussing paragraph (b) of Rule 1.7, the Comment to the rule describes the critical question in terms of whether the dual obligation "will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client." If a material limitation is possible, then the lawyer may proceed with the representation of the client only if the lawyer reasonably believes that the representation will not be adversely affected and the client consents.
The interests of the client, whether it be buyer or lender or both, at a real estate closing do not appear to conflict per se with the interests of the insurer. While it may be true that an insurer normally wishes to limit his exposure while an insured normally wishes to maximize his protection, it does not necessarily follow that their interests are inherently contradictory. A title insurer typically limits his exposure by excluding from coverage any known defects, encumbrances, or clouds on the title. The insurer, therefore, has an interest in discovering all such limitations on clear title. The purchaser and lender have the same interest. Although the interests of the purchaser or lender and of the insurer are not inherently conflicting, there may be occasions in which their interests could conflict. For example, when there is a possibility of a cloud on title, but the risk of an actual encumbrance is small, the buyer or lender may want the title insurer to insure the potential problem. The insurer, on the other hand, may want to exclude the potential problem from coverage. In that situation, the lawyer's relationship with a particular insurer as its agent could "materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client." The lawyer might fail to recommend that the client seek coverage from another insurer or fail to pursue negotiations with the insurer as zealously as if the lawyer was not also its agent.
In the limited number of cases in which the lawyer's relationship with the insurer interferes materially with the representation of the client, the lawyer must reasonably determine whether the attorney-client relationship will be adversely affected. On the facts of a given case, the lawyer may be unable to continue the legal representation of the purchaser or lender. However, if the lawyer reasonably believes that the fiduciary obligation to the insurer as its agent has been fulfilled by allowing the insurer to offer a proposal and that the lawyer will be able fully to represent the interests of the client in negotiating a more favorable proposal, the lawyer may proceed as both attorney and insurance agent, if the client consents after consultation. Conflicting Interests of Client and Lawyer Rule 1.7 (b) applies also to situations in which the representation of a client may be materially limited by the lawyer's own interests. Rule 1.8 (a) further prohibits a lawyer from entering into a business transaction with a client or acquiring a pecuniary interest adverse to a client, unless the transaction is fair and reasonable on terms disclosed clearly in writing to the client, the client has a reasonable opportunity to seek independent counsel, and the client consents in writing.
A lawyer serving as agent for a title insurer clearly has a financial interest in placing title insurance with that insurer, since the lawyer would be paid a commission by the insurer. As agent for the insurer, the lawyer is entering into a transaction with the client for the sale and purchase of insurance. Under Rule 1.8 (a), however, that fact alone does not automatically disqualify the lawyer from serving also as attorney for the purchaser of the insurance. The transaction must be fair to the client, the client must have a reasonable opportunity to seek other counsel, and the client must consent in writing. State law already requires certain disclosures by a lawyer-agent to certain parties. The lawyer for a seller, buyer, or lender is included as a "producer of title business" under Title 38 of the South Carolina Code. Title insurance agents and the insurers must disclose to purchasers, sellers, and lenders any financial interest of the producer of the title business. Thus, clients must be informed of the lawyer's financial interest in the transaction. S.C. Code Ann. S 38-75-960.
Insurance regulation 69-18 also applies to payments by a title insurance company to a lawyer for the parties at a closing. The regulation specifically provides that the limitations upon such payments "shall not be deemed to preclude payment by a title insurer of normal commissions to an agent, representative or attorney" of the buyer or lender. The same regulation later requires that the agent make "a fair disclosure of the rate or amount" of his or her commission. The disclosure must include written notice of the right to choose the insurer to be used. It must inform the purchaser fully and fairly of the limitations of a mortgage policy with regards to the owner's interest. It must advise the purchaser of the availability of an owner's policy.
In addition to making the disclosures mandated by law, in order to comply with Rule 1.7(b), the lawyer must believe reasonably that there will not be an adverse impact upon the client and, prior to obtaining consent, the lawyer-agent also must be careful to inform the client fully of any potential impact on the lawyer's professional judgment, such as the risk that the lawyer's own interest may influence the lawyer's recommendation of an insurer. Disclosures should be made at the outset of the representation of the buyer. Other states are not in total agreement regarding the ethical propriety of closing attorneys also selling title insurance. A New Jersey ethical opinion concludes that a law firm may not refer clients to a title insurance agency owned by a lawyer in the firm who is a title agent and owner of the agency. New Jersey Adv. Op. # 639. On the other hand, a Virginia opinion permits a lawyer to purchase title insurance for clients through an insurance company in which the lawyer owns a financial interest, as long as there is adequate disclosure. Va. State Bar Op. # 886 (April 1987).
An Ohio opinion permits a lawyer to direct clients to a title agency owned in part by the lawyer if it is obvious the lawyer can still represent the clients and there is full disclosure. The Ohio opinion further states that if the lawyer "represents a party to a real estate transaction in a legal capacity and also owns an interest in a title insurance agency and needs to negotiate insurance coverage for his client, he must disclose the conflict of interest, disclose the effect of those conflicts, and obtain consent. Without consent, the lawyer would be obligated to withdraw." Ohio State Bar Formal Op. 37 (1989). An opinion of the New York State Bar Association permits a lawyer to act both as counsel and as title agent, provided there is no conflict, both parties consent, and the lawyer remunerates the client for any commission paid to the lawyer, unless the client consents to the retention of the commission. The lawyer is not permitted to receive compensation for originating the employment of the insurer and may not retain fees paid for services that duplicate legal services performed for the client. N.Y. State Bar Op. #576 (June 1986).
Applying the old Model Code of Professional Responsibility, the American Bar Association issued a formal opinion in 1972 that "there is nothing necessarily unethical in an attorney recommending title insurance and acting as title examiner and agent for the title insurance company in a real estate transaction or a loan transaction so long as the attorney makes full disclosure to his client and does not violate any of the Rules of Professional Responsibility." ABA Formal Op. # 331 (Dec. 1972). This Committee also has previously addressed the role of lawyer as title agent without finding inherent problems in the relationship. See, e.g., S.C. Adv. Ops. # 82-20 (permitting dual role with proper disclosure and consent); #89-17 (allowing lawyer to own and act as agent of abstracting company); # 91-21 (a law firm may serve as title agency without creating separate entity).
The South Carolina Supreme Court has never suggested that these opinions, some of which are relatively longstanding, are inaccurate. Nothing in the current Rules of Professional Conduct requires a new per se rule prohibiting a lawyer from also selling title insurance to clients. This does not foreclose the possibility that, from time to time, conflicts may arise between the interests of the lawyer and the client necessitating the lawyer's withdrawal. In most instances, however, the interests of the client are adequately protected by disclosure and consent requirements.
For all of the reasons set forth, we believe the better view is that set forth in our prior opinions and in ABA Formal Opinion 331, and we decline to follow the opinions of states such as New Jersey and New York, which would limit drastically the practice now followed in this state. Protection of Confidences We previously have indicated that a lawyer who serves as title agent must not disclose protected information of a client without proper consent of the client. S.C. Adv. Op. 89-03 (Sept. 1990). To the extent that the lawyer's duties as agent would necessitate a breach of Rule 1.6, the lawyer cannot serve in both capacities.
Sharing Legal Fees With Non-Lawyers Rule 5.4 prohibits a lawyer from sharing legal fees with a non-lawyer except in certain very limited circumstances. However, as long as the insurer receives only premiums paid by the client and no part of the legal fees charged by the lawyer, there is no violation of Rule 5.4.