By: Arend J. Abel, Attorney

Occasionally, a lawyer will run into a situation where someone other than the client agrees to pay the lawyer for the representation.  This situation arises most frequently with insurance, but also can occur when a company pays for an employee’s defense or a relative pays for the representation of an individual.  Third-party payment creates ethical issues for the lawyer, and is specifically governed by the Indiana Rules of Professional Conduct.  Rule 1.8(f) provides:

A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1)    the client gives informed consent;

(2)    there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

(3)    information relating to representation of a client is protected as required by Rule 1.6.

Each of the required “elements” that are necessary for such an arrangement to be permissible requires some explanation.

“Informed consent” is a term of art in that Rule 1.0(e) defines as “the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.”  The material risks of a third-party arrangement typically are that the third-party will have different objectives for the representation than the client and will attempt to control the representation to achieve those objectives.  For example, an insurance company may have interests in coverage issues that conflict with those of the insured.  An employer may be more interested in minimizing its own risk of liability than defending the employee.  These are risks that should be explained to the prospective client, ideally in the engagement letter.

Often, there will be no “reasonably available alternatives” to the third-party arrangement because the client may not have the resources to pay for the representation.  In such situations, the burden of explanation is lower, but not non-existent.  The risks of the arrangement should still be explained.  If the client does have the resources to pay for the representation, that possibility should be discussed with the client.

The second requirement, that there be no “interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship” means that the lawyer must look to the client for direction concerning the representation in those areas where client decision-making is required, such as settlement.  It also means that the lawyer must take or recommend steps in the representation that are in the client’s best interest, even if they may not necessarily be in the interest of the third-party payor.  The lawyer must, essentially, take steps to represent the client as though no third-party payor exists, though of course, the lawyer must take care not to damage the client’s prospects of having the third-party pay to defend or indemnify the client.

The third requirement, that information regarding the representation must be protected as required by Rule 1.6 means that the lawyer must not reveal client confidences to the third-party payor, except with the client’s informed consent or where necessary to carry out the purposes of the representation.  It may be that the third-party payor requires status updates as a condition of ongoing payment for the defense of the suit, and bills may need to be sent to the third-party payor.  If that is the case, the lawyer should secure client consent to make such reports.

While third-party payment arrangements create risks to the client, and the lawyer, if Rule 1.8(f) is followed, those risks can be mitigated or avoided, so that the client may have effective representation that the client perhaps could not otherwise afford.