Utah Bar Opinion No. 19-01

ISSUE

1. Is it permissible for a firm to charge the cost of a litigation insurance policy to the client if the firm recovers funds for the client, through a settlement or positive trial verdict, and the client’s liability for payment of costs is contingent on a recovery?

OPINION

2. A firm may charge the cost of a litigation insurance policy to the client if the firm recovers funds for the client, through settlement or positive trial verdict, and the client’s liability for payment of costs is contingent on a recovery, as long as:

(1) the terms are fair and reasonable to the client, fully disclosed to the client, and transmitted in writing 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;

(3) the client agrees, in a writing signed by the client, to assume the cost of the litigation insurance policy upon recovery; and

(4) the insurance company has no decision-making power in the client’s case and the insurance policy does not in any way interfere with the law firm’s independence of professional judgment or the attorney-client relationship.

BACKGROUND

3. Typically, attorneys who undertake cases on a contingency fee basis do not charge the client “costs,” but recover costs if there is a recovery. Such attorneys often advance large sums of money as “costs” during the litigation. Some attorneys have purchased insurance to cover these costs in the event of a loss or a recovery too small to cover the costs. Now the question arises whether the attorney may ethically charge the cost of this insurance to the client if the firm recovers funds for the client through a settlement or positive trial verdict and the client’s liability for payment of costs is contingent on a recovery.

ANALYSIS

4. The Utah Rules of Professional Conduct (“URPC”) implicated in this opinion are the following:

• Rule 1.2(a). Scope of Representation and Allocation of Authority Between Client and Lawyer
• Rule 1.4. Communication
• Rule 1.5. Fees
• Rule 1.6. Confidentiality of Information
• Rule 1.7. Conflict of Interest: Current Clients
• Rule 1.8(a). Conflict of Interest: Current Clients: Specific Rules
• Rule 1.8(f). Conflict of Interest: Current Clients: Specific Rules

5. The proposed agreement between firm and client is not specifically prohibited by the Utah Rules of Professional Conduct. A contingent fee agreement must comply with Rule 1.5, which states, in pertinent part: “A lawyer shall not make an agreement for, charge or collect an unreasonable fee or an unreasonable amount for expenses.” URPC Rule 1.5(a). Pursuant to Rule 1.5(c), a contingent fee agreement shall be in writing signed by the client, stating the method by which the fee is to be determined, and when and to what extent litigation and other expenses are to be deducted from the recovery. URPC Rule 1.5(c). Upon conclusion of a contingent fee matter, the firm shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.

6. The firm’s purchase of an insurance policy to cover expenses in the event of a loss and contracting with the client to reimburse the premiums paid by the firm in the event of a recovery, may also invoke Rule 1.8(a) of the Utah Rules of Professional Conduct, as a business transaction with the client or the knowing acquisition of an ownership, possessory, security or other pecuniary interest adverse to the client. If so, the transaction and terms on which the firm acquires its interest must be fair and reasonable to the client, fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client. The client may need to be advised in writing of the desirability of seeking the advice of independent legal counsel on the transaction and given a reasonable opportunity to seek said counsel. And the client may need to give informed consent, [1] in writing signed by the client, to the essential terms of the transaction and the firm’s role in the transaction.

7. In the case of a loss, the firm is effectively accepting monies for its representation of a client from one other than the client, and Rule 1.8(f) of the Utah Rules of Professional Conduct applies. In this instance, the client must give informed consent, there shall be no interference with the firm’s independence of professional judgment or with the attorney-client relationship, and information relating to representation of a client shall be protected as required by Rule 1.6 of the Utah Rules of Professional Conduct. As such, the firm shall ensure that the insurance company has no decision-making power in the client’s case and that the policy itself does not interfere with the firm’s independence of professional judgment or the attorney-client relationship.[2]

8. The ultimate amount the client is required to pay upon recovery for the insurance premium must be reasonable both when charged and when collected pursuant to Rule 1.5 of the Utah Rules of Professional Conduct. For example, if, in a particular case, the client settles or prevails at trial but is awarded a lesser sum than expected, such that charging the premium in addition to the contingent fee and expenses would substantially deplete the amount the client recovers, charging the premium to the client may be unreasonable. If the amount calculated in the fee agreement for the premium is thereby unreasonable, the firm must not enforce this part of the agreement. This is true even if the litigation costs and the percentage used to calculate the premium are reasonable and/or agreed as reasonable by the client.

9. The insurance coverage that protects monies advanced by the firm in a contingent fee arrangement may provide an indirect benefit to the client, [3] because it gives the firm greater confidence in incurring costs litigating a client’s case in a way that would maximize the results for the client. The client may well be willing to pay for this benefit in the form of reimbursement for the cost of insurance in the event of recovery.

10. Alternatively, such an insurance policy may encourage the firm to go to trial rather than accept a settlement offer for the client. For example, if costs in a particular case are substantial, this may motivate the firm itself to push for going to trial. This raises the possibility of a conflict of interest between the firm and the client.[4] However, certain conflicts of interest are inherent in contingency fee cases. For instance, a firm may prefer the client accept a low settlement offer so the firm receives some fees, while the client may desire to reject the offer and go to trial. As there is always the potential for such conflicts, the safeguards of Rules 1.2(a) and 1.4, Utah Rules of Professional Conduct, unless excepted otherwise, direct lawyers to abide by a client’s decisions concerning the objectives of representation, consult with the client as to the means by which they are to be pursued, and abide by a client’s decision whether to settle a matter. The purchase of litigation cost protection insurance does not alter this dynamic of the lawyer-client relationship.

CONCLUSION

11. The Utah Rules of Professional Conduct do not preclude a firm from purchasing a litigation insurance policy and charging the cost of the policy to the client upon recovery, as long
as the terms are fair and reasonable, fully disclosed in writing in a manner that can be reasonably understood by the client, the client is advised to seek independent counsel and given the
opportunity to do so, the client agrees in writing to the terms of the agreement, the insurance company has no decision-making power in the client’s case, and the policy does not interfere
with the firm’s independence of professional judgment or the attorney-client relationship.[5]


[1] “Informed Consent” denotes the agreement by a person to a proposed course of action after the lawyer has communicated adequate information and explanation of the material risks of and
reasonably available alternatives to the proposed course of action. See URPC Rule 1.0(f).
[2] Accord Utah Ethics Advisory Op. Comm. (“EAOC”), Op. 02-01 Appx. (2002) (citing Ga. State Bar, Formal Op. 92-1 (1992) (lawyer to ensure that bank understands that its contractual arrangement can in no way affect or compromise lawyer’s obligation to client)).
[3] Although the purchase of an insurance policy by the firm may provide an indirect benefit to the client, the policy itself, in the scenario presented to the EAOC, rather provides financial
assistance to the firm in the event of a loss. Rule 1.8(e) of the Utah Rules of Professional Conduct states: “A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that: (e)(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter . . . .” Comment 10 to Rule 1.8(e) states: “Lawyers may not subsidize lawsuits or administrative proceedings brought on behalf of their clients, including making or guaranteeing loans to their clients for living expenses, because to do so would encourage clients to pursue lawsuits that might not otherwise be brought and because such assistance gives lawyers too great a financial stake in the litigation. These dangers do not warrant a prohibition on a lawyer lending a client court costs and litigation expenses . . . because these advances are virtually indistinguishable from contingent fees and help ensure access to the courts.” An insurance policy that covers the costs of litigation in the event of a loss may reduce the lawyer’s financial stake in the litigation, by reducing the lawyer’s losses. The client’s agreement to cover the cost of the insurance premium in the event of recovery may further reduce the lawyer’s losses and financial stake in the litigation.
[4] If a conflict arises from the added component of litigation insurance, the firm would need to perform an analysis under Rule 1.7 of the Utah Rules of Professional Conduct.
[5] Accord Utah EAOC, Op. 02-01 Appx. (2002) (citing Tex. Comm’n on Prof’l Ethics, Op. 465 V. 54 Tex. B.J. 76 (1991) (attorney may borrow money from a lending institution for case expenses, and charge or pass on to the client the actual out of pocket interest or finance charges)).

North Carolina Ethics Opinion

The North Carolina Bar Approves Passing Your Litigation Cost Protection Premium to Your Client

2018 Formal Ethics Opinion 6

Shifting Cost of Litigation Cost Protection Insurance to Client

Adopted: July 27, 2018

Opinion rules that, with certain conditions, a lawyer may include in a client’s fee agreement a provision allowing the lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict.

Inquiry:

Lawyer would like to purchase “litigation cost protection” insurance for matters he handles on a contingency fee basis. The insurance is purchased by a lawyer on a case-by-case basis for a one-time premium payment. The insurance is available for purchase up until 90 days after the initial complaint has been served upon the defendant(s). The insurance reimburses a lawyer for litigation costs advanced by the lawyer only in the event of a trial loss.

Inquiry #1:

Do the Rules of Professional Conduct prohibit a lawyer from purchasing litigation cost protection insurance for his contingency fee cases?

Opinion #1:

No. A lawyer has a duty to avoid conflicts of interest with his client. According to Rule 1.7(a), a lawyer has a conflict of interest if the representation of a client will be materially limited by a personal interest of the lawyer. The purpose of the insurance policy is to protect the lawyer’s investment in the costs and expenses of litigation. However, the insurance reimburses the lawyer only in the event of a trial loss. The lawyer and the client may have different cost-benefit calculations. Therefore, the terms of the policy incentivize going to trial in certain scenarios, which raises the possibility of a conflict of interests between the lawyer and the client.

However, there are inherent conflicts of interests present in every case taken on a contingency basis. A lawyer may prefer that his client accept a low settlement offer to ensure that the lawyer receives his fee, while the client wants to reject a settlement offer and take his chances at trial. In either event, the client has the ultimate authority regarding settlement of the client’s matter. Rule 1.2(a)(1). The presence or absence of a litigation cost protection insurance policy does not alter this dynamic of the client-lawyer relationship.

Lawyer may purchase litigation cost protection insurance so long as Lawyer does not allow the terms of the coverage to adversely affect Lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.

Inquiry #2:

If Lawyer recovers funds for the client through a settlement or favorable trial verdict, Lawyer proposes to be reimbursed for the insurance premium from the judgment or settlement funds. Lawyer intends to disclose the cost of the insurance to the client as part of the representation agreement.

May Lawyer include in a client’s fee agreement a provision allowing Lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict?

Opinion #2:

Yes. A provision in a fee agreement requiring client reimbursement of a particular expense implicates a lawyer’s professional duties under Rule 1.5. Rule 1.5(a) provides that a lawyer shall not charge an illegal or clearly excessive fee or charge or collect a clearly excessive amount for expenses. Rule 1.5(b) requires a lawyer who has not regularly represented a client to communicate to the client the basis of the fee and expenses for which the client will be responsible. Specifically as to contingency fees, Rule 1.5(c) provides:

A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial, or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated [emphasis added]. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party….

The premium for the insurance is an “other expense” that Lawyer intends to deduct from any recovery. Therefore, the amount of the insurance premium must not be clearly excessive, and the circumstances under which the client is responsible for reimbursement of the premium must be clearly communicated to the client and clearly set out in the written fee agreement. Lawyer must describe with specificity what the insurance is and why Lawyer believes a litigation cost protection policy will serve the client’s best interests. Lawyer must also inform the client that other lawyers may choose not to purchase or to charge the client for the cost of a litigation cost protection policy. Finally, Lawyer must provide the client with the opportunity to review the insurance policy.

The Florida Bar determined that litigation cost protection insurance 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 1.8(a)].” Florida Bar Staff Opinion 37289 (Revised 2018). Florida’s version of Modal Rule 1.8(a) (which is substantially the same as NC Rule 1.8(a)) provides that a lawyer may enter into a business transaction with a client or acquire a pecuniary interest directly adverse to a client if: (1) the transaction and terms are fair and reasonable to the client and are fully disclosed and transmitted in writing 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.

The Florida Bar concluded that in each instance in which a lawyer wishes to purchase litigation cost protection insurance and shift the cost to the client, the lawyer must consider the ethics concerns set out in Rule 1.8(a). Florida Bar Staff Opinion 37289 (Revised 2018). The Florida Bar also concluded that, prior to seeking the client’s informed consent, the lawyer must make “an objectively reasonable determination” that purchasing the insurance benefits the client prior to seeking the client’s informed consent. Id.

Similarly, a North Carolina lawyer must satisfy these professional responsibilities, in addition to those implicated by Rule 1.5, when the lawyer intends to be reimbursed for the insurance premium from the judgment or settlement proceeds. The lawyer may include in a client’s fee agreement a provision allowing the lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict upon satisfying the following conditions:

(1) the amount to be charged to the client is not clearly excessive under the guidelines set out in Rule 1.5;

(2) the circumstances under which the client is responsible for reimbursement of the insurance premium are clearly communicated to the client and clearly set out in the written fee agreement;

(3) 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, and that other lawyers may advance the client’s costs without charging the client the cost of a litigation cost protection policy;

(4) the lawyer provides the client with the opportunity to review the litigation cost protection policy;

(5) the transaction and terms are fair and reasonable to the client pursuant to the guidelines set out in Rule 1.8(a);

(6) 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 regarding the arrangement;

(7) the lawyer obtains the client’s informed consent in writing at the beginning of the representation; prior to seeking the required informed consent, the lawyer has to make an objectively reasonable determination that purchasing the insurance benefits the client; and 

(8) the lawyer does not allow the terms or availability of coverage under the insurance policy to adversely affect the lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.

Florida Bar Staff Opinion 37289

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:

  1. the lawyer makes an objectively reasonable determination that the litigation cost protection insurance coverage serves the client’s best interests;
  2. 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;
  3. 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;
  4. 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;
  5. the lawyer provides the client with the opportunity to review the litigation cost protection policy;
  6. the client is advised, in writing, of the desirability of seeking, and is given the opportunity to seek, independent counsel;
  7. the lawyer obtains the client’s informed consent in writing at the beginning of the representation; and
  8. 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:

  1. the policy premium is not a cost of obtaining or presenting evidence;
  2. other lawyers would provide the same or better representation without charging the policy premium expense to the client; and
  3. 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