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Should a lawyer sign a lien indemnity agreement at mediation?


Let’s say that after many hours of mediation, the parties are getting very close to reaching an agreement. All that remains is to hammer out the details. At that point, the attorney for the defendant tenders his standard release and settlement agreement to plaintiff’s attorney. After many pages of boilerplate language, there appears the seemingly standard "indemnification and hold harmless" provision, protecting the defendant from the plaintiff’s failure to pay the medical liens. However, in our hypothetical case the language went further, and required not only the plaintiff, but also his attorney, to indemnify and hold the defendant harmless if the liens are not paid.

Let’s also assume that in this case there were sufficient funds coming from the settlement to pay all the plaintiff’s medical liens, but that plaintiff’s attorney knew his client had a serious disagreement with the care and amount of the bill of one of his health care providers. However, at this point all of the parties and their lawyers were tired and wanted to go home, but everyone was committed to concluding the settlement first. The only thing standing in the way of completing the deal was this one provision, which the plaintiff’s lawyer felt would not ever really be a problem from a practical standpoint. They would surely work something out with the health care provider; or his client, wanting his settlement proceeds, would relent and pay the questioned lien. That being the case, why shouldn’t he and his client go ahead and sign the agreement and get it over with?

This kind of agreement is not only fraught with danger, but also presents an ethical problem for Florida lawyers. When a lawyer agrees to pay a client’s debt, only after the client has failed to do so, The Florida Bar views the agreement to pose a conflict of interest between the lawyer and the client, which is impermissible under Rule 4-1.8(e) of the Rules of Professional Conduct. This is the rule which prohibits a lawyer from providing financial assistance to a client in connection with litigation. The question came up in a Florida Ethics Opinion, although in a slightly different context. The issue was whether an attorney can give a letter of indemnification to a bonding company, when the terms required the attorney to reimburse the surety if his client failed to do so. In Professional Ethics Opinion 70-8 (as revised April 23, 1993), the Bar found the indemnification agreement to put the lawyer’s interest in conflict with that of the client, by requiring the lawyer to reimburse the surety only after his client had failed to do so.

Although this Ethics Opinion is not on "all fours" with indemnification agreements in personal injury cases, there is little other formal interpretation of the conflict of interest rules by The Florida Bar in this context. An inquiry to the Ethics Department of the Bar reveals that the Bar considers the practice to be contrary to the Rules of Professional Conduct, and relies upon Ethics Opinions from at least a dozen other states which clearly prohibit the practice on conflict of interest grounds. For example, Arizona Ethics Opinion 03-05 states that a plaintiff’s attorney may not agree to indemnify defendants against claims by a third party to a lien against settlement proceeds. Not only would plaintiff’s counsel be agreeing to provide financial assistance, but the agreement would create a conflict for the plaintiff’s attorney because the attorney may be inclined to recommend a settlement based on the best interest of the lawyer, rather than the best interests of the client. The basis of the Arizona Ethics Opinion is typical of the reasoning of the other state bars, including Illinois, Indiana, Kansas, Missouri and North Carolina, among others.

The Florida Rules of Professional Conduct prohibit conduct that potentially places a lawyer’s interest above that of the client. Therefore, in addition to Rule 4-1.8(e) regarding lending financial assistance to a client, Rule 4-1.7(a)(2) should also be considered in our hypothetical case, since it prohibits conduct which would likely compromise the client because of the personal interests of the lawyer.

Although the Ethics Opinions seem to be geared more towards plaintiff’s counsel in personal injury cases, it is quite conceivable that the issue may arise when drafting hold harmless agreements in litigation involving counterclaims, as well as in commercial litigation where other claims and crossclaims are still in play. In all of these situations, counsel should be aware of this issue in drafting settlement agreements.