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September 1, 2013
Advisory opinion dealing with insurance companies and trust account auditing

The Professional Ethics Committee has issued Proposed Advisory Opinion 12-4 reprinted below. Pursuant to Rule 4(c) and (d) of The Florida Bar Procedures for Ruling on Questions of Ethics, comments from Florida Bar members are solicited on the proposed opinion. The committee will consider any comments received at a meeting which will be scheduled after comments are received. Comments must contain the proposed advisory opinion number and clearly state the issues for the committee to consider. A written argument may be included explaining why the Florida Bar member believes the committee's opinion is either correct or incorrect and may contain citations to relevant authorities. Comments should be submitted to Elizabeth Clark Tarbert, Ethics Counsel, The Florida Bar, 651 E. Jefferson Street, Tallahassee 32399-2300, and must be postmarked no later than 30 days from the date of this publication.


PROFESSIONAL ETHICS OF THE FLORIDA BAR
Proposed Advisory Opinion 12-4
(August 21, 2013)

A member of The Florida Bar has requested an advisory ethics opinion. The legislature adopted section 626.8473 (8), Florida Statutes, effective July 1, 2012, which states:
        An attorney shall deposit and maintain all funds received in connection with transactions in which the attorney is serving as a title or real estate settlement agent into a separate trust account that is maintained exclusively for funds received in connection with such transactions and permit the account to be audited by its title insurers, unless maintaining funds in the separate account for a particular client would violate applicable rules of The Florida Bar.
The inquirer asks for guidance regarding compliance with both the statute and the applicable Rules Regulating The Florida Bar. Trust accounts established pursuant to section 626.8473 (8), Florida Statutes (2012), must comply with the Interest on Trust Accounts (IOTA) Program, Rule 5-1.1 (g), Rules Regulating The Florida Bar. The rule requires that lawyers place short term or nominal funds in an IOTA trust account. Lawyers should place funds that are not short term or nominal in a separate trust account with interest accruing to the benefit of the client or third party who owns the funds. The inquirer’s firm employs numerous attorneys who handle real estate transactions and work with multiple title insurers. Some real estate transactions involve no title insurance. The inquirer asks two questions which will be addressed in turn:

      Question 1: Is an attorney permitted to allow a title insurance company to audit the firm’s special trust account used exclusively for real estate and title transactions without the informed consent of the clients who have no involvement with that particular title insurance company?

As explained below, a lawyer is not permitted to allow a title insurance company to audit the special trust account used exclusively for real estate and title transactions if the special trust account holds funds for client transactions that are unrelated to the title insurer requesting the audit, unless the affected clients give informed consent or an exception to the confidentiality rule applies.

Rule 4-1.6 (a), Rules Regulating The Florida Bar, prohibits a lawyer from voluntarily disclosing any information regarding a representation without a client’s informed consent, unless one of the exceptions to the rule applies, and states:
      Rule 4-1.6 Confidentiality of Information
      (a) Consent Required to Reveal Information. A lawyer shall not reveal information relating to representation of a client except as stated in subdivisions (b), (c), and (d), unless the client gives informed consent.

Emphasis added.

The Preamble of the Rules of Professional Conduct defines informed consent as follows:
      "Informed consent" denotes 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 comment to Rule 4-1.6 further explains that confidentiality is fundamental to the trust that is the hallmark of the attorney-client relationship and emphasizes the broad scope of the rule:
      The confidentiality rule applies not merely to matters communicated in confidence by the client but also to all information relating to the representation, whatever its source.

Emphasis added.

The confidentiality rule is limited by several exceptions that would permit a lawyer to voluntarily disclose a client’s information without informed consent. The only exception relevant to the present inquiry is Rule 4-1.6 (c) (1), which permits a lawyer to disclose information without a client’s informed consent if the lawyer reasonably concludes that the disclosure is necessary to serve the client’s interest, unless the client has specifically instructed otherwise.

Florida Ethics Opinion 93-5 acknowledges that a lawyer must obtain a client’s consent
Rule 4-1.6 (a), Rules Regulating The Florida Bar (1994), did not require informed consent, as is required by the current applicable rule, and states: “A lawyer shall not reveal information relating to a representation of a client except as stated in subdivisions (b), (c), and (d), unless the client consents after disclosure to the client.” Emphasis added. The term “disclosure” was not defined in the 1994 Preamble. to permit a title insurer to audit the lawyer’s general trust account, but advises that if the lawyer uses a special trust account exclusively for transactions in which the lawyer acts as the title or real estate settlement agent on behalf of that insurer, the exception under Rule 4-1.6 (c) (1) may permit the audit without a client’s informed consent. The committee recognized that a client’s interest is served if the title insurer’s audit ensures the safety of the funds held in the special trust account and facilitates a satisfactory conclusion for clients whose funds are held in the account:
      An attorney who is an agent for a title insurance company may not permit the title insurer to audit the attorney's general trust account without consent of the affected clients. The attorney, however, need not obtain client consent before permitting the insurer to audit a special trust account used exclusively for transactions in which the attorney acts as the title or real estate settlement agent.
      . . . .

      . . . Subdivision (c)(1) authorizes an attorney to disclose confidential information "to serve the client's interest unless it is information the client specifically requires not to be disclosed." The committee recognizes that audits by title insurance underwriters are necessary to ensure the safety of the funds deposited in the special trust account and thus facilitate a satisfactory conclusion for those whose funds are placed in the account. Consequently, if a special trust account is used exclusively for transactions in which the attorney is acting as the title or real estate settlement agent, the attorney ethically may permit the proposed audits unless the attorney has been specifically directed otherwise by the client.
Florida Ethics Opinion 93-5 (emphasis added).

The facts of the present inquiry are distinguishable from those addressed in Florida Ethics Opinion 93-5. The inquiry addressed in Opinion 93-5 was presented by a lawyer from the general counsel of a title insurance company asking on behalf of the company wanting to audit, Florida Ethics Opinion 93-5 was outside the scope of ethics opinions customarily issued by the Professional Ethics Committee. and therefore the opinion was written under the assumption that only transactions insured by that one title insurer would be included in the special trust account discussed in the opinion.

The inquirer’s firm employs many lawyers who serve as title agents for different title insurers and who represent many different clients in unrelated transactions. Some clients’ transactions involve no title insurer. The inquiry states that each title insurer wants to audit the trust account used by its own title agents. Even if the firm maintains a separate trust account exclusively for real estate and title transactions, the account will hold funds for different clients who are represented by different lawyers who are title agents for different title insurers, and some client funds will be held for transactions that involve no title insurer.

If the firm permits each title insurer to audit the separate trust account without clients’ informed consent, each insurer will obtain information relating to the firm’s representation of clients who are not involved in any transaction with that particular title insurer. The inquirer’s affirmative duties to inform and explain under Rules 4-1.4 and 4-1.6 (a) would be triggered under such circumstances, unless the lawyer reasonably concludes that allowing all title insurers to audit the trust account is reasonably necessary to serve each affected client’s interests or the affected clients have specifically prohibited the lawyer from disclosing the information.

Based on the foregoing, the answer to the inquirer’s first question is no, an attorney is not permitted to allow a title insurance company to audit the special trust account used exclusively for real estate and title transactions if the special trust account holds funds for client transactions unrelated to the title insurer requesting the audit, unless the attorney obtains the affected clients’ informed consent or the lawyer reasonably concludes that the audits are reasonably necessary to serve the affected client’s interests and the affected clients have not prohibited the disclosure.

If, however, consistent with Florida Ethics Opinion 93-5, the special trust account is used exclusively for real estate and title transactions insured by a single title insurer, the inquirer may allow that one title insurer to audit the special trust account without a client’s informed consent.
      Question 2: If an attorney is not ethically permitted to allow a title insurer to audit the special trust account without the clients’ informed consent because the special trust account involves unrelated transactions, but new section 626.8473 (8), Florida Statutes, requires that attorney to allow the audit, does the attorney abide by the ethics rules or the statute?
The inquirer’s second question arises from concerns regarding the interpretation of section 626.8473 (8), Florida Statutes, which became effective July 1, 2012, and states:

      (8) An attorney shall deposit and maintain all funds received in connection with transactions in which the attorney is serving as a title or real estate settlement agent into a separate trust account that is maintained exclusively for funds received in connection with such transactions and permit the account to be audited by its title insurers, unless maintaining funds in the separate account for a particular client would violate applicable rules of The Florida Bar.

Although questions of statutory interpretation are beyond the scope of an ethics opinion, pursuant to Procedure 2 (a) (1)(D), Florida Bar Procedures for Ruling on Questions of Ethics (2012), the committee offers the following general discussion to provide guidance to bar members.

The statute appears to mandate that lawyers maintain a separate trust account devoted exclusively to funds held in connection with transactions in which the lawyer serves as a title or real estate settlement agent. The statute appears to further require that the lawyer permit the separate trust account to be audited by multiple title insurers.

As discussed in the answer to the inquirer’s first question, Rule 4-1.6 (a), Rules Regulating The Florida Bar would require that a lawyer obtain each client’s informed consent before permitting multiple title insurers to audit a single trust account, even if that separate trust account was devoted exclusively to holding funds for clients’ real estate and title transactions, unless the lawyer reasonably concludes that the audits are necessary to serve the interests of the affected clients and the affected clients have not specifically prohibited disclosure of the information. Consistent with Florida Ethics Opinion 93-5, a lawyer would not be required to obtain clients’ informed consent to permit one title insurer to audit a separate trust account that is devoted exclusively to funds for clients’ transactions that are insured by the one title insurer requesting the audit, because the audit would serve the clients’ interests under Rule 4-1.6 (c) (1).

If the lawyer concludes that permitting the audits by multiple title insurers is not necessary to serve affected clients’ interests or if affected clients have instructed the lawyer not to disclose the information, the lawyer should consider maintaining: 1) a separate trust account for each different title insurer used by that lawyer or law firm, or 2) one separate trust account and obtain each client’s informed consent to disclose information regarding their transactions to multiple title insurers for their audits, or 3) one separate trust account and obtain consent from the various title insurers to audit only the information related to transactions that the title insurer is underwriting. With respect to number 2 in the preceding sentence, the lawyer may obtain the client’s informed consent in the sales contract or in a separate document executed by the client prior to or at the closing.

In sum, the inquirer may not permit multiple title insurance companies to audit a single trust account used exclusively for real estate and title transactions, unless the lawyer reasonably concludes that permitting the audits would serve the affected clients’ interests and the affected clients have not prohibited disclosure of the information. The inquirer may permit a title insurer to audit a single trust account used exclusively for client transactions insured by the title insurer requesting the audit. The answer to the inquirer’s second question offers three alternatives that may harmonize the inquirer’s obligations under the applicable Rules Regulating The Florida Bar and the statute if the lawyer concludes that permitting the audits is not necessary to serve the affected clients’ interests or if affected clients’ have prohibited the lawyer from disclosing the information.

[Revised: 06-25-2014]