DANGER: Ethics Violations in Settlement Agreements Plaintiff’s Counsel Violates RPC By Agreeing to Indemnify Defendants for Liens

    Very strong indemnity/hold harmless language regarding liens, especially with regards to Medicaid and Medicare, are now standard in most settlement agreements.  As plaintiff’s attorneys, we often see language that obligates not just the plaintiff, but also his or her counsel to indemnify the defendants and their insurance carriers against lien and reimbursement claims by health plans

    With defendants and liability carriers being directly exposed to Medicare and Medicaid lien enforcement, they will want the maximum possible security against being held responsible for liens.  Defendants and carriers may want the plaintiff’s attorney named as an indemnitor in the settlement agreement because plaintiff’s counsel would generally be a more secure source of indemnity than an individual plaintiff.  

    Plaintiff’s counsel may feel pressure to agree to provide indemnity because all parties have a joint interest in finalizing a settlement and closing the related liability claim.  

    Since this issue usually comes up after the basic terms of the settlement are reached, and the plaintiff develops an expectation of imminent payment, it can be difficult to explain to the plaintiff that the rules of ethics prohibit plaintiff’s counsel from being a party to an indemnity clause in the settlement agreement.  The plaintiff/client’s likely response may be to simply demand the lawyer sign rather than blow apart the settlement. What’s a lawyer to do?

    According to the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee, as stated in Opinion No. 532, [here], “Plaintiff’s counsel in a personal injury action may not enter into an agreement to defend and indemnify defendants, defense counsel or their liability insurers against an action brought against them by third parties, such as Medicare or health insurers, to recover a debt plaintiff might owe the third parties”. To do so would violate multiple Rules of the RPC, including creating a direct conflict of interest between lawyer and client.  The opinion goes on to conclude that if a client demands the lawyer agree to such an agreement, the lawyer should withdraw. That’s harsh!

    However, there is a silver lining: defense counsel may be violating the rules of ethics just by demanding that the plaintiff’s counsel sign an indemnity agreement. The Committee stated, “defendant’s counsel’s demand that plaintiff’s counsel agrees to indemnify defendants and their agents would violate rule 8.4(a), which prohibits a lawyer from soliciting or inducing a violation of the Rules of Professional Conduct or the State Bar Act.”. Thus, we have the mechanism to cut this issue off at the start.

    Contrast this opinion with the California Supreme Court’s opinion in Monster Energy Co. v. Schechter, 7 Cal. 5th 781 (2019), where the Court determined that a plaintiff counsel’s intention to be bound by a confidentiality provision in a settlement agreement was deemed a question of fact, despite the fact that plaintiff’s counsel signed only as, “Approved as to Form and Content”.  The Monster Energy opinion contains no discussion or citation to the Rules of Professional Conduct, although the same conflict of interest issues would seem to arise. This may reflect the anti-SLAPP procedural setting of the case and that the gravamen of the action was counsel’s personal conduct of allegedly violating a confidentiality clause, rather than counsel agreeing to indemnify third parties.

Practical Practice Tips:

1.  If proposed settlement documents include language seeking to bind plaintiff’s counsel to indemnity/hold harmless language, push back hard. A letter including Opinion No. 532 should result in its removal.

2. You may have to reach some agreement concerning resolution of the “liens” that allows a settlement while giving the liability carriers assurance that they are not at risk as to the liens. If the lien/recovery interests are not resolved, consider:

A. Having the liability carrier hold the amount of the “lien” and tender the balance of the settlement fund. Carriers generally don’t like this because it holds the accounting on the claim file open.

B. Have the carrier issue two drafts: one payable in the amount of the lien to lienholder and plaintiff’s counsel’s trust account, and another for the balance of the settlement to plaintiff and his/her counsel. When the lien resolves, return the draft to the carrier and have it reissued (This is somewhat standard practice.).

C. Agree to escrow of the claimed “lien” amount, until it is resolved. This is becoming more popular since it allows the liability claim file to fully close.

3. The best practice approach is to get started on the lien/recovery interest early so that by the time the case is ready to resolve, you have the lien processing/reduction well under way. In many instances, progression of the liability claim/case can be used to leverage reduction of lien/reimbursement claims. Indeed, in ERISA, FEHBA, and MAO matters, getting a deal on the lien in place before the case settles is vital.

The Lien Project is here to help. Trial lawyer to trial lawyer.