A client may execute a waiver of future conflicts, but the practice is disfavored.
I am representing several clients for claims of injuries resulting from a motor vehicle accident. Can I have the clients, as part of the fee agreement, sign a consent to waive future conflicts of interest that might arise in this representation? Can this waiver of future conflicts extend to the handling and negotiation of a global settlement on behalf of the several clients?
First, the concept of a future waiver of conflict of interest has to be discussed generally. In the past, future waiver of conflict of interest was not usually favored. But Rule of Professional Conduct 1.7, which is the general conflict of interest rule, does not appear to prohibit future waivers of conflict. In fact, Comment 22 to Rule 1.7 appears to allow such waivers, but there has to be informed consent.
Under Rule 1.7, there can’t be representation of multiple clients if the clients will be directly adverse to each other or if the representation is materially limited by the lawyer’s responsibilities to another client or a third person or the interest of the lawyer. This gets tricky, because the interest of the lawyer is to have as many clients as possible to maximize the settlement and maximize the fee.
The multiple representation may be good for the lawyer but may not be good for the individual clients. It might be better if each had their own lawyer, particularly if there is a limited insurance coverage and there is going to be an aggregate settlement. Under Rule 1.7(b), there can be waivers of conflicts if the lawyer can provide diligent and competent representation, the representation is not prohibited by law, the representation does not involve a claim of one client against another and each client gives informed consent.
The effectiveness of the informed consent is going to vary on the facts of each case and the sophistication of each client. A lawyer should reduce the informed consent to writing and set forth in detail the nature of the conflict.
Comment 22 to Rule 1.7 notes that whether a lawyer can waive conflicts that might arise in the future is subject to the Rule 1.7(b) test as described above. The comment notes the effectiveness of any waiver is determined by whether the client reasonably understands the material risk involved in waiving the conflict. The comment urges a very comprehensive explanation and a written agreement. The comment also notes that the waiver has to be specific and not something “general and open-ended.” The comment notes that even if there is a waiver of future conflicts with full consent, if some of the issues arise under the Rule 1.7(b) analysis at a later time, then the future informed consent will no longer be valid.
In preparing these adverse waivers, the better practice is not to represent multiple clients, particularly if there is a limited amount of money in the insurance policy. The best approach is for a lawyer to take one client and refer the other clients to other competent counsel. But the law does allow multiple representation under these limited circumstances.
The question of an aggregate settlement gets a little more complicated. Settlements are governed by several rules — not only Rule 1.7 in reference to conflict of interest, but also Rule 1.2(a). That rule is the scope of representation and gives the client the final say in accepting or rejecting a settlement.
Rule 1.8 of the Rules of Professional Conduct is the specialized conflict of interest rule. Under Rule 1.8(g), a lawyer who represents two or more clients should not participate in an aggregate settlement unless each client gives informed consent. The informed consent has to be a disclosure of the nature of all claims and the participation of each person in the settlement. Comment 13 to Rule 1.8 notes a lawyer must inform each client about all material terms of the settlement, including what each client is going to receive.
Therefore, it is difficult to imagine that there can be an informed waiver of an aggregate settlement in advance. How could that occur if the lawyer doesn’t even know what the amount of the settlement is going to be?
The American Bar Association’s Formal Opinion 2005-436 allows informed future waivers of conflict. But that opinion emphasizes the informed consent and full disclosures. There is a specific American Bar Association ethics committee Formal Opinion, 06-438, that addresses aggregate settlements and ethical issues. This opinion requires a very detailed, informed consent. Detailed discussion of this opinion is found in Pennsylvania Ethics Handbook, 2011 Edition, which is edited by Michael Temin and Thomas Wilkinson Jr.
The authors note that, at least in New Jersey, as of 2006, an advanced consent by multiple plaintiffs that everyone would agree to a decision of the majority with respect to an aggregate settlement would violate the ethical rules involving informed consent. In other words, at least in New Jersey, informed consent for aggregate settlements that require multiple clients to agree with the majority decision is not allowed and unethical.
There does not appear to be a Pennsylvania opinion on that issue, but it would appear that Pennsylvania courts would probably take the same position, because there could be no informed consent without specifics. Further, a majority vote would definitely violate Rule of Professional Conduct 1.2, which gives the client the sole right to agree or disagree with a settlement and to overrule the lawyer’s recommendation on the issue of settlement.
In addition, every lawyer has to be aware, in this area of advanced informed consent, that nothing can prevent the client from terminating the lawyer under Rule 1.16. Therefore, after all of the informed waivers in the world, the client could still terminate the lawyer and seek other counsel.
In conclusion, advance waivers, particularly in the area of aggregate settlements, are a very dangerous place for lawyers to be. If a lawyer intends to do advance waivers, then there better be very comprehensive consent, which is understandable. The informed consent must be in writing. The better practice, except in extreme circumstances, would be not to engage in advance future conflict waivers. It is better to look out for the client than the lawyer’s interest and it is a rare case where representing multiple clients can allow a lawyer to really protect an individual client’s interest.
Lawyers should generally refrain from
recommending that a client use an insurance
agency the lawyer owns.
I am preparing an estate plan for a client and I am also an insurance agent. Can I have the client purchase the insurance through me as part of the estate plan?
The question is extremely worrisome. It deals with lawyers engaged in multiple businesses while practicing law. Much of this would have been prohibited in years past, but times have changed and lawyers are allowed to some extent to be involved in non-legal businesses, even if they interact with their law practice.
Any lawyer who is involved with multiple businesses and a law practice must read and study Rule of Professional Conduct 5.7 in terms of responsibilities regarding non-legal services. This rule is particularly important because it explains when a lawyer will be held to the standards of the Rules of Professional Conduct when operating with the non-legal business. That can make a major difference in terms of competitiveness for a lawyer. A non-legal business normally does not have the high standards required of all lawyers. If the non-legal business is held to those standards, then the lawyer might not be as competitive in the non-legal business.
Rule of Professional Conduct 5.7 notes what a lawyer has to do to ensure that the lawyer is not bound by the Rules of Professional Conduct in a non-legal business. Obviously, non-legal services that are not distinct from legal services would be covered by the Rules of Professional Conduct. Non-legal services that are distinct may not be, depending on whether the lawyer takes certain steps outlined under the rules.
But every lawyer has to recognize that if there is a commingling of non-legal services and legal services, there is a real potential for conflict of interest. This is also a great area for misunderstanding, even by sophisticated clients. Comment 2 to Rule 5.7 notes that when a lawyer provides both legal and non-legal services, there is “the potential for ethical problems.”
The comment notes that the client may not understand the protection in an attorney-client relationship might not apply to the other business.
Clearly, lawyers involved in acting as a lawyer, developing an estate plan, and then attempting to sell the insurance to help fund and prepare the estate plan through the lawyer’s other business as an insurance agent have a conflict of interest. Basic rules of conflict of interest under Rule of Professional Conduct 1.7 clearly create a concurrent conflict of interest if the lawyer’s interest may outweigh the client’s interest. There may be some waiver, but there has to be full disclosure and it has to be understandable and complete.
It is difficult to imagine the situation where a lawyer preparing an estate plan would allow the client to use the lawyer for any annuities or insurance through the lawyer’s insurance license. Such activity seems that the lawyer would be benefiting from that and perhaps there is a better way to do the estate plan than that type of insurance or any type of insurance for that matter.
There are bar association opinions allowing lawyers to sell life insurance to clients, etc. But in the context of actual legal representation, it would appear that the lawyer is using his or her insurance license to make money for the lawyer’s legal representation, which would be a direct conflict that should be prohibited. Can the lawyer keep an independent judgment or is the lawyer eager to get a fee from the life insurance company? This kind of conduct would appear to be prohibited and should not be engaged in by an attorney.
Perhaps this writer is old-fashioned, but the best suggestion is for a lawyer who is practicing law and representing clients in the practice of law not to engage in both law and non-legal businesses. When one starts to cross-fertilize and get clients whom the lawyer represents to be involved with other businesses of a lawyer, such as a real estate license or insurance license or an auctioneer license, conflicts start to arise.
It is understandable in this modern world where there is very little money for legal fees anymore why lawyers would attempt to engage in multiple businesses just to keep afloat and earn a living. But the lawyer can never put the client’s interest secondary to the lawyer’s interest. These multiple businesses using clients, particularly if the multiple businesses intersect with the lawyer’s legal representation, are danger zones filled with conflict of interest landmines that could explode at any time and cost a lawyer his or her law license or some form of discipline. In any event, if a lawyer chooses to be involved in non-legal business, there has to be full and complete disclosure.
But to answer the question, it would appear, without a full and complete disclosure and waiver (assuming that could even be done because of the absolute conflict here), the lawyer should not recommend insurance through the lawyer’s insurance agency to be part of the lawyer’s estate planning for his or her legal client. Professionalism requires the lawyer solely look out for the client, not the lawyer’s non-legal insurance business.
Chester County lawyer Samuel C. Stretton has practiced in the area of legal and judicial ethics for more than 35 years. He welcomes questions and comments from readers. If you have a question, call Stretton directly at 610-696-4243 or write to him at 301 S. High St. P.O. Box 3231, West Chester, Pa., 19381.