Revised as approved by The Florida Bar Board of Governors by vote of 23-17 on January 26, 2018
Florida Bar ethics counsel are authorized by the Board of Governors of The Florida Bar to issue informal advisory ethics opinions to Florida Bar members who inquire regarding their own contemplated conduct. Advisory opinions necessarily are based on the facts as provided by the inquiring attorney. Advisory opinions are authored in response to specific inquiries and may not be applicable to anyone other than the inquiring attorneys referenced in them. Opinions are not rendered regarding past conduct, questions of law, hypothetical questions or the conduct of an attorney other than the inquirer. Advisory opinions are intended to provide guidance to the inquiring attorney and are not binding; the advisory opinion process is not designed to be a substitute for a judge’s decision or the decision of a grievance committee. The Florida Bar Procedures for Ruling on Questions of Ethics can be found on the bar’s website at www.floridabar.org.
A member of The Florida Bar has requested an advisory ethics opinion. The operative facts as presented in the inquiring attorney’s letter are as follows.
The inquirer is a Florida attorney who owns a company that offers “litigation cost protection” insurance. As explained by the inquirer, this insurance coverage “protects the money advanced by [a lawyer], pursuant to a contingent fee arrangement, by reimbursing those advanced funds to the [lawyer] in the event of a trial loss.” By contrast, the inquirers wish to know whether the cost of the litigation insurance policy could be charged to the client if the inquirers recover funds for their clients through a settlement or positive trial verdict and the client’s liability for payment of costs is contingent on a recovery. The inquirers requested this opinion after reviewing Florida Bar Staff Opinion 37055, which concluded that it would be improper to charge the cost of these insurance policies to the client where the repayment of costs is contingent on the outcome of the matter.
The inquirers assert that the existence and individualized cost of the insurance coverage would be disclosed to each affected client in writing in the client’s contingent fee agreement. Because the cost of the insurance policy is individualized to the particular client’s matter, the inquirers state that the policy would be identified and allocated to the individual client on a case-by-case basis and billed in the client’s closing statement. The inquirers also suggest that these policies would assist the client by providing the lawyer with “more confidence… in spending additional money… and otherwise litigating a case in a way that will maximize results for the client.”
In sum, the inquirers ask: “May [a lawyer] advance, as a cost (to be reimbursed by the client at the close of litigation), a premium for an insurance policy that covers the risk of losing the money that has been spent by [a lawyer], on behalf of the client, on litigation costs in the event that case is lost at trial?”
The inquiry poses a close question because the circumstances described create potential conflicts of interest between the lawyer and the client throughout the course of litigation. Moreover, the potential conflicts exist regardless of whether the lawyer pays the litigation cost protection insurance premium as a matter of general overhead or whether the client reimburses the premium expense out of recovery proceeds. Only when the client agrees at the outset of the representation to pay all costs and expenses of litigation as they are incurred, the client decides to purchase the insurance policy, and the client is the sole beneficiary of the policy as the named insured, would the committee have few, if any, concerns about potential conflicts of interest.
At the outset, this opinion notes that litigation cost protection insurance does not fit neatly within the classification of either “general overhead” to be accounted for in the lawyer’s fee or “in-house costs or services” a client may agree to pay. See R. Reg. Fla. Bar 4-1.5 cmt. Consequently, the question posed implicates several ethics rules. After considering each of those rules, a lawyer may charge a client for the premium expense of a litigation cost protection insurance policy only when:
- the lawyer makes an objectively reasonable determination that the litigation cost protection insurance coverage serves the client’s best interests;
- the amount to be charged to the client is fair and reasonable and is communicated to the client, in writing, in a manner that the client can reasonably understand;
- the lawyer fully explains to the client what litigation cost protection insurance is, why the lawyer believes a litigation cost protection policy will serve the client’s best interests, that the lawyer will be the sole beneficiary under the insurance policy, and that the client will be liable for the insurance premium expense and all other costs and expenses in the event of a recovery;
- the lawyer fully explains to the client that other lawyers may advance the client’s costs without charging the client the cost of the litigation cost protection policy;
- the lawyer provides the client with the opportunity to review the litigation cost protection policy;
- the client is advised, in writing, of the desirability of seeking, and is given the opportunity to seek, independent counsel;
- the lawyer obtains the client’s informed consent in writing at the beginning of the representation; and
- the lawyer does not allow the terms or availability of coverage under the insurance policy to adversely affect their independent professional judgment, the client-lawyer relationship, or the client’s best interests.
At the most basic level the question touches on the duty of competence. Rule 4-1.1, Rules Regulating The Florida Bar, requires lawyers to use “methods and procedures meeting the standards of competent practitioners.” R. Reg. Fla. Bar 4-1.1 cmt. Hence, the expense of litigation cost protection insurance should not be passed to the client if the security afforded by coverage is a significant consideration in the lawyer’s decision to undertake representation in the first instance. In other words, if the lawyer is not financially positioned to undertake the methods of competent practitioners in the absence of a litigation cost protection insurance policy, the policy is a cost of general overhead because it enables the lawyer to meet the competency threshold.
The duty of competence also touches on the lawyer’s disclosure and communication obligations. “The lawyer should consult with the client about the degree of thoroughness and the level of preparation required as well as the estimated costs involved under the circumstances.” R. Reg. Fla. Bar 4-1.1 cmt. Similarly, commentary to Rule 4-1.5, governing fees and costs for legal services, explains that “[t]he lawyer should sufficiently communicate with the client regarding the costs charged to the client so that the client understands the amount of costs being charged or the method for calculation of those costs.” R. Reg. Fla. Bar 4-1.5 cmt. And the text of Rule 4-1.5 provides that “[w]hen the lawyer has not regularly represented the client, the basis or rate of the fee and costs shall be communicated to the client, preferably in writing. . . .” R. Reg. Fla. Bar. 4-1.5(e)(1).
In addition to the communication components of Rules 4-1.1 (competence) and 4-1.5 (fees and costs for legal services), Rule 4-1.4 speaks specifically to the lawyer’s mandatory communication obligations. For example, the lawyer must “reasonably consult with the client about the means by which the client’s objectives are to be accomplished,” R. Reg. Fla. Bar 4-1.4(a)(2), and “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” R. Reg. Fla. Bar 4-1.4(b). Commentary under the “Explaining matters” heading references the lawyer’s “duty to act in the client’s best interests” and notes that “when a lawyer asks a client to consent to a representation affected by a conflict of interest, the client must give informed consent.” R. Reg. Fla. Bar 4-1.4 cmt. (emphasis added).
Read together, Rules 4-1.1, 4-1.4, and 4-1.5 require the lawyer to fully explain to the client all material aspects of the litigation cost protection insurance policy. The material aspects that must be explained include, but are not limited to, that other lawyers may advance the client’s costs client without charging the client the costs of litigation insurance, the narrow circumstances in which a claim under the policy would be paid, that the client will pay the cost of the insurance policy out of any recovery in the matter, that the lawyer will be the sole beneficiary under the insurance policy, and that, in the event of recovery, the client will be responsible for paying all other costs and expenses incurred in the representation without offsetting credit for the expense of the litigation cost protection insurance policy. To provide full transparency, the lawyer also must provide the client with the opportunity to review the litigation insurance contract.
Asking a client to reimburse the expense of litigation cost protection insurance out of the client’s recovery also implicates rules governing conflicts of interest because the insurance primarily serves the lawyer’s financial interests. Three facts illustrate this point:
- the policy premium is not a cost of obtaining or presenting evidence;
- other lawyers would provide the same or better representation without charging the policy premium expense to the client; and
- the likelihood a compensable claim will arise is extremely low considering:
- that coverage exists only when a fact-finder returns an adverse verdict on the merits at trial; and
- the low percentage of cases actually tried to judgment. See, e.g., S. District Judge Xavier Rodriguez, The Decline of Civil Jury Trials: A Positive Development, Myth, or the End of Justice As We Now Know It?, 45 St. Mary’s L.J. 333 (2014) (estimating the percentage of cases disposed of by a judgment at trial as less than two percent in both federal and state courts).
Rule 4-1.8(e) permits a lawyer to advance the court costs and expenses of litigation:
(e) Financial Assistance to Client. A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
But litigation cost protection insurance does not fall within the rule because the insurance policy is not itself a litigation expense; insurance is not a cost or expense of “obtaining and presenting evidence.” R. Reg. Fla. Bar 4-1.8 cmt. (“Financial assistance”). Rather, the purpose of the insurance policy is to protect the lawyer’s investment in the costs and expenses of litigation.
For that reason, litigation cost protection insurance raises the possibility of economic tension and conflicts of interest between the lawyer and the client. Because the insurance contract incentivizes going to trial, the lawyer and the client may have very different cost-benefit calculations. Therefore, “there is a substantial risk that the representation of 1 or more clients will be materially limited by … a personal interest of the lawyer.” R. Reg. Fla. Bar 4-1.7. See also R. Reg. Fla. Bar 4-1.7 cmt. (“Lawyer’s Interest . . . [A] lawyer’s need for income should not lead the lawyer to undertake matters that cannot be handled competently and at a reasonable fee.”).
In short, the litigation cost insurance product is part of a business agreement, albeit with a third party rather than with the client, creating circumstances resembling the conflicts of interest that can arise, and be cured, pursuant to Rule 4-1.8. That rule provides in pertinent part:
(a) Business Transactions With or Acquiring Interest Adverse to Client. A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, except a lien granted by law to secure a lawyer’s fee or expenses, unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
The inquirer must consider the above ethics concerns in each instance in which the inquirer wishes to purchase litigation cost protection insurance and pass the cost to the client in the event of a recovery. The inquirer must make an objectively reasonable determination that purchasing the litigation cost protection insurance benefits the client prior to seeking the client’s informed agreement that the inquirer will purchase the policy and the inquirer will be repaid the costs of the policy out of a recovery.
In conclusion, the nature of litigation cost protection insurance, the financial interests protected by the insurance policy, and the limited circumstances in which a compensable claim arises under the policy require the lawyer to proceed with caution. The inquirers may charge a client for the premium expense of a litigation cost protection insurance policy only upon satisfying the six conditions described in this opinion. This opinion addresses only the ethics issues involved in the inquiry and does not endorse the concept of litigation cost insurance policies.
Index: 4-1.1, 4-1.4, 4-1.5, 4-1.7, 4-1.8