Ethics Issue – Attorneys Cannot Indemnify on Behalf of Clients
Roy Franco
February 20, 2011

Many times our Company is asked whether or not it is appropriate for a lawyer to sign a release agreement that includes an indemnification clause by the lawyer or law firm.  The issue has come up more frequently as primary plans (insurance carriers and self insureds) attempt to navigate their contingent liabilities created by the Medicare Secondary Payer Act.  Prevailing thought is that if the lawyer agrees to the indemnity clause they are then appropriately incentivized to complete the reimbursement obligations owed Medicare.  While that aspect may be true, this form of leverage is losing ground as States are issuing opinions that find the practice unethical.

The most recent opinion was handed down by The Supreme Court of Ohio’s Board of Commissioners on Grievances and Discipline on 2/11/2011.  To access the opinion click here:  http://www.supremecourt.ohio.gov/Boards/BOC/Advisory_Opinions/2011//op_11-001.doc.  The short answer in jurisdictions, like Ohio, is that a lawyer cannot offer financial assistance to his or her client, except in narrowly defined situations such as advancement of court costs.  Indemnification by an attorney is not one of those exceptions.  It is like a guarantee of client’s debts which violates this duty.  There is a conflict between lawyer and client as the best interests of the client competes with the interests of the lawyer to limit financial exposure.  These competing interests cannot co-exist.

How can a primary plan protect itself in these jurisdictions?  The answer is simple, ethics!  The same code that prevents lawyers from offering up indemnity also bounds them to carefully manage client funds.  If a third party has claim to client funds, then the lawyer cannot ethically distribute the funds until that claim is resolved.  If done, the lawyer would subject to discipline and possibly suspension by the State Bar.   Resolution of cases involving Medicare beneficiary claimants automatically creates an interest by Medicare to be reimbursed for medical items and services related to the case.  See 42 U.S.C. §1395y(b)(2)(B)(ii).  Moreover, it not only makes Medicare beneficiaries responsible for this reimbursement, but their lawyers as well.  See U.S. v. Harris 2008 U.S. Dist. LEXIS 92415.  There is no notice requirement and primary plans should spell out this responsibility in any release document.

At this point, the following States have also issued opinions finding the practice of demanding indemnification from a lawyer unethical:  Arizona, Illinois, Indiana, Kansas, Missouri, North Carolina, South Carolina, Tennessee, and Wisconsin.  More than likely, New York and Florida will follow based on prior opinions on related topics and the opinions of local bar associations.  While this is only a handful of states, it is more likely than not, that other states will follow in the same manner as most professional ethic codes are based on a model code which has been adopted by most State Bars.

Since it is equally unethical for a lawyer to ask for the indemnification, it would probably be a good practice to check with your State Bar before sending out a release.

Franco Signor, LLC is a nationally-recognized leading expert on Medicare Secondary Payer (MSP) compliance. Please visit us @ www.francosignor.com or contact us via email @ engage@francosignor.com or by phone @ 1-716-877-4MSP (4677) for any assistance we can provide.

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UPDATE 

Florida Bar Opinion – Unethical for Plaintiff’s Counsel to Agree to Indemnify the Defendant for Medicare Liabilities

On April 1, 2011, the Florida Bar issued Staff Opinion 30310. The opinion arose out of a dispute between opposing counsels in a personal injury lawsuit. The attorneys specifically sought the Florida Bar’s ethical opinion on whether an attorney, in a personal injury matter, “may personally sign a settlement release containing a hold harmless and indemnification agreement in favor of the opposing party which would obligate the plaintiff’s attorney to indemnify and hold harmless the defendant for any future liability under the Medicare Secondary Payer Act (MSP).”

The Florida Bar found that such an agreement violates Florida Bar Rule 4-1.8(e)[1] and 4-1.7(a)(2)[2],  in essence finding that such an indemnification agreement would amount to providing improper financial assistance as well as creating a conflict of interest with the Plaintiff attorney’s client.

The Florida Bar reasoned that Rule 4-1.8(e) would not allow such an indemnification agreement due to the fact that “(a) Plaintiff’s agreement to hold harmless and indemnify a Defendant from third-party claims arising out of the defendant’s settlement payments to the plaintiff is not a court cost or expense of litigation. Therefore, it is prohibited by the Rule.”

The Florida Bar also reasoned that Rule 4-1.7(a)(2) would be violated by such an indemnification agreement because “. . .it creates a substantial risk that the representation of the client would be materially limited by the lawyer’s personal interest in not having to pay the client’s debts.”

This is an interesting interpretation by the Florida Bar since under the MSP, specifically 42 US§1395(y)(b)(2)(B)(iii), Medicare can seek recovery from any responsible party/entity that has received the proceeds of a settlement, judgment, or award. This recovery right includes the plaintiff/Medicare beneficiary, Plaintiff’s attorneys, providers and other entities. The U.S. government exercised this recovery right in a famous decision of U.S. v. Harris, 2009 WL 891931 (N.D. W.Va.), wherein Mr. Harris, a Plaintiff attorney, was forced to personally reimburse Medicare for conditional payments which had not been satisfied. Here, the Florida Bar is apparently drawing a clear distinction between (a) the government’s statutory right to seek repayment under the MSP and (b) a private party’s ability to indemnify via an agreement.

Therefore, as it relates to conditional payments, while it is unethical under this Florida Bar opinion for a Plaintiff attorney to promise to do something (indemnify the Defendant), it is also clear that the Plaintiff attorney is already liable under the MSP. Furthermore, when Medicare has not been reimbursed for conditional payments, and has the choice of seeking recovery against a Plaintiff or Plaintiff’s counsel, clearly Medicare will seek recovery from the deeper pocket first, which would generally be the Plaintiff attorney and not the Plaintiff. In summary, while the Florida Bar has concluded that a conflict of interest can be created between the client and Plaintiff attorney through these indemnification provisions, one cannot ignore the ultimate fact that both parties have a duty to make sure Medicare’s interests are satisfied under the MSP.

Although this Florida Bar ethics opinion does not appear consistent with the aims of the MSP, Florida attorneys should be aware of this opinion nonetheless and should take this ethics opinion into consideration when crafting settlement documents.