Dangers in Disbursements
Balancing Ethical Priorities When Policy Limits Aren't Enough
By Curt Hamilton
BACH HAMILTON LLP
270-844-4398 or 866-793-6224 (Toll-Free)
As attorneys, we focus our efforts on obtaining the best possible settlement or judgment for our clients when we are representing Plaintiffs. Most of us have been trained over the years to think that when the case is settled, our work is done. Once the insurance check comes in, we have our clients sign it, deposit it into our IOLTA escrow account, and then a few days later we distribute the funds to our client and into our operating account based on our contingency agreement. This is asking for trouble.
Let's assume you have a client who was badly injured in a car accident, with $125,000 in medical bills and $25,000 in lost wages. Her health insurance provider has paid $100,000 in medical bills. Your client also has received short-term disability benefits from her employer-sponsored plan. Unfortunately, there is only $100,000 in liability and UIM insurance available. Both the liability provider and the UIM provider have sent you checks for their policy limits before litigation was necessary.
Now you've got $100,000 deposited in your IOLTA account, subject to your contingency fee and expenses. Your client wants you to cut her a check for her entire share, and ignore resolving any claims from the health insurance company and disability insurance company. Prior to the U.S. Supreme Court's decision in Sereboff v. Mid-Atlantic Services, Inc., we could advise our clients that their health insurance companies were likely not going to sue them because equitable remedies were the only remedies available. Now what do we do?
Ethics Dilemma
Before distributing funds from your IOLTA account, several ethical conflicts must be resolved. First, while our core duty as lawyers is no longer defined by "zealous representation," the Rules of Professional Conduct impose duties of competence and diligence. In the context of distributing settlement proceeds, does this mean that we must put as much money into our clients' hands as possible, under the bounds of the law? We must abide by our client's decisions concerning the objectives of our representation, even after we reasonable advice to the contrary. In this context, a client's objective is almost always to take home as much money as possible from the proceeds of a settlement. Certainly, the client does not want to "lose" everything to third party insurance subrogees and receive nothing.
In Comment 1 to SCR 3.130(1.2), the Kentucky Supreme Court states that lawyers must assume responsibility for technical and legal tactical issues, but should defer to the client regarding concerns for third persons who might be adversely affected by the outcome of a case. We are required to give an honest opinion about the actual consequences that appear likely to result from a client's conduct. We also are ethically barred from revealing information about the case to any third parties, particularly before suit is filed, and even if the client's proposed conduct is questionable. In a policy-limits case, a client's health insurer, disability provider, and other third parties who may have contractual subrogation claims may not even know about them. A lawyer's duty of confidentiality, particularly when combined with our duty of zealous representation and a client's direction not to contact potential third party claimants, seemingly means that we must not divulge the claim, amount of a settlement, or any other matters to third party claimants, subrogees, or lien holders.
On the other hand, lawyers also have a duty, in effect, to represent third parties who may have a claim against settlement proceeds which come into our hands by safekeeping that property. As it applies here, SCR 3.130(1.15)(b) provides that "upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. The same rule also states that "except . . . by agreement with the client, a lawyer shall promptly deliver to the client or third person the funds . . . that the client or third person is entitled to receive. " SCR 3.130(1.15)(c) provides that if we receive money in which we and another person claim interests, we must keep the funds in our escrow account until the dispute is resolved. However, Comment 3 to Rule 1.15 tells us that while we may have a duty to protect third-party claims against wrongful interference by a client, we must not unilaterally assume to arbitrate a dispute between a client and a third party. Most health insurance and disability plans have subrogation provisions, and many now also have language indicating that reimbursement for accident-related medical claims must occur, and that the insured person specifically waives any state or federal make-whole rules in policy-limits cases.
How are these conflicts to be resolved? To whom do we as lawyers owe the greater ethical duty, our client or third party claimants who may not even know they have a claim? As with many questions in our profession, the answer is unclear, and there is no well-developed law to guide us.
Likelihood of reimbursement litigation after the Sereboff decision.
If an ERISA provider has paid accident-related benefits, 29 U.S.C. 1132(a)(3) provides that a health insurance company may bring a civil action against your client to enforce the provisions of the terms of the plan, including the reimbursement/subrogation provisions. In Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (May 15, 2006), the Supreme Court held that third-party insurance companies could bring reimbursement actions against their insureds to recover proceeds received from a tortfeasor's insurance company. The court did not address whether or not the make-whole doctrine, such as it is in the Sixth Circuit or in Kentucky, was still applicable; in fact, Justice Roberts specifically noted that the make-whole defense was not raised earlier in the suit. . However, at least one Court of Appeals has determined, post-Sereboff, that the make-whole rule does not apply when an ERISA plan has appropriate subrogation language.
Of course, this course of action does not apply in cases where Medicare or Medicaid has made accident-related payments to your client's medical care providers. Both entities have statutory liens against the proceeds of any settlement, and therefore attorneys have an unquestionable duty under Ethics Rule 1.15 to notify the government and resolve the claims. In fact, federal law provides that attorneys can be personally liable for failing to reimburse Medicare.
In the final analysis, you must advise your client that she will likely be sued by her health or disability provider if she persists in her instruction to keep the accident and any settlement confidential. No longer may we advise our clients that ERISA plans have only equitable remedies available, and that they should not keep any settlement funds separate from their other assets in order to avoid reimbursement of third party insurance liens. Unfortunately, this will mean in many instances that we are not really representing our clients; we are simply recovering funds for our clients' insurance providers, and our clients will get nothing.
Deal With Confidentiality Issues at the Beginning of a Case
Upon your initial interview with the client, you must clearly establish whether or not your client wants you to communicate facts and circumstances about her accident with her health and disability insurance companies. Include language in the contingency fee agreement that the attorney has advised the client of potential third-party claims and the likelihood of liability for reimbursement, but the client has directed that no such claimants be advised of the case until approved by the client.
The best course of action in any case in which health insurance or disability insurance companies have made payments for accident-related losses is to obtain a copy of the plan language. All clients who participate in an employer-sponsored benefits program have been given a summary plan description, and are able to obtain a copy of the full policy of insurance from their human resources departments. Ask your client to provide you with a copy of the full policy as soon as possible in the case, so that you can best advise the client as to the recommended distributions.
Also, many health insurers now send questionnaires and separate reimbursement agreements as soon as they are billed for accident-related services. If your client has already disclosed that an accident has occurred by returning the questionnaire and agreement, contact the health insurance company yourself and obtain copies of the documents signed by your client and also request copies of the summary plan description and full health insurance policy.
With these documents in hand, you will be in the best position to advise your client when settlement proceeds are ready to be distributed. Of course, if your client has not been contacted by the health insurance company and believes that doing so would alert the company to its potential subrogation claim, advise the client, in writing, of the likelihood of such a claim. Also confirm, in writing to your client, that your client has advised you to keep the accident and the potential proceeds from the accident confidential, and that you have been instructed to refrain from contacting the third party providers.
Get a Hotline Opinion
If a client persists in advising you to not withhold any funds for negotiation and payment of health and disability insurance liens, the best way to determine ethical implications of such conduct is to contact our district KBA Ethics Hotline attorney and obtain a written advisory opinion. The names of the district representatives are available on the web site, and most can be contacted by telephone, letter, or email. In addition to getting a very helpful opinion as to your ethics dilemma, obtaining a hotline opinion insulates lawyers from future bar proceedings pursuant to SCR 3.530(3), provided that the request for the opinion clearly states your proposed course of action. Keep in mind that this immunity provision only applies if you follow the exact course of action proposed in your Hotline request, and provides no insulation from a lawsuit for professional malpractice or a claim against you by Medicare, Medicaid, or a health insurance company.
Execute a Written Settlement Accounting and Release
At the end of contingency fee case, lawyers should ask a client to sign a Settlement Accounting and Release document which sets forth all of the end-of-case issues at distribution. In addition to itemizing all funds received, fees and expenses, this document is the best instrument available to again clearly delineate the issues surrounding negotiation and payment of third party claims.
If the health or disability insurance company still is unaware of its claim, advise the client again in the text of the document that the client is directing you to distribute funds over any such potential claim. Explain to the client that this means that the health insurance company may file suit against the client for reimbursement, but in spite of this risk, the client has requested and will receive the money. We also include a hold harmless clause indicating that the client will reimburse and defend the lawyer from any claim against the lawyer by a third party insurer.
The Future of Policy Limits Settlements
In the wake of Sereboff, it is likely that the make-whole doctrine will soon be effectively extinct with respect to ERISA plan reimbursement. When badly injured clients come into our offices with minimal liability and UIM coverage available, we have to advise them that health insurance companies have the right to sue them for benefits. Will lawyers still be inclined to take cases, knowing in advance that the "client" is really a third party insurer? Are pain and suffering damages still available in such a circumstance? Without legislation or addressing the matter, plaintiffs with health insurance will not even be recovering lost wages if their medical expenses exceed available policy limits.
Until the legislature addresses this issue, our clients will advise us to conceal their personal injury settlements from third party providers. Before doing so, be sure that you have considered all of the ethical ramifications of such a course of action, and get a Hotline opinion.
