Panel finds insurance for litigation costs can’t be passed on
Panel finds insurance for litigation costs can’t be passed on
Ethics Committee holds insurance for contingency-fee cases is a business expense, not a court cost
Senior Editor
If lawyers buy insurance to cover the litigation costs in contingency-fee cases, they cannot pass that expense along to clients, according to the Professional Ethics Committee.
The PEC, at the Bar’s Fall Meeting, for the second time considered the request from a law firm that wants to provide litigation cost insurance. The policies would reimburse attorneys their advance litigation costs if the case is lost at trial and therefore no recovery in a contingency-fee case.
The inquiring law firm wanted to know if the policy’s cost could be added to case expenses paid by the client if the case is successful at trial or there is a settlement. Such policies are now being offered across the nation, and The Florida Bar is one of the first state bars to look at the ethical implications.
The committee considered the issue at its June meeting and declined to endorse a staff opinion and instead referred it to a subcommittee. The staff opinion said it was improper to charge the client because the premiums should be considered part of office overhead.
The subcommittee prepared an opinion that said the issue was complex because the insurance premium didn’t fit neatly as either general overhead to be covered by the attorney’s fee or in-house costs and services that a client might agree to pay. It concluded that the client could be charged for the premium expense only if several conditions were met, including that it served the client’s best interest, the client is fully advised about the insurance, including being given the chance to seek the advice of outside counsel, the client gives consent in writing, and the terms and conditions of coverage do not affect the attorney’s independent judgment or handling of the case.
After discussion, the committee rejected an amended version of the subcommittee’s opinion that would have informed the client some attorneys might not pass along the premium cost and gave the client the option of reviewing the insurance contract. The vote was 7-18.
The committee then moved to affirm the original staff opinion that the costs could not be passed along by a 20-1 vote.
“I personally would not pass this cost on to the client.. . . But the question is: May an attorney do that?” said committee Vice Chair Thomas W. Young, who chaired the subcommittee. He spoke after the meeting. “What we were interested in doing as a subcommittee was preparing an opinion setting very clear standards on how that ethically could be done if it was to be done.”
He said the subcommittee looked at the types of expenses attorneys are allowed to pass on to clients, conflict of interest rules and waivers on those, and the right to contract.
“The [staff opinion] still does not address all sides of the issue, and I think we’re missing an opportunity to set the polestar for the nation,” Young said.
Loula Giannet, who moved to accept the staff opinion, disagreed.
“The subcommittee opinion, although very thoroughly considered, carefully drafted and extensively discussed, missed the fundamental premise that ultimately the insurance policy benefits the attorney at the expense of a client and results in excessive costs,” she said, also speaking after the meeting.
“There was concern that the committee and subcommittee points being discussed were the underlying purpose of the policy, issues of freedom of contract, access to justice, pros and cons of litigation funding, and other very detailed issues,” she added. “This is all acceptable for us to consider. However, this analysis obfuscated the fundamental fact that the policy, supported by the subcommittee opinion, resulted in unreasonable and excessive costs passed onto the client.”
Other committee members agreed, and one noted that the proposal shifts the risk of advancing the fees from the lawyer to the client.
Giannet said the committee’s careful approach was shown in that it considered the matter over two meetings, set up a subcommittee to take a deeper look, and many members changed their minds after the in-depth debate.
The approved staff opinion said, “The litigation insurance policy proposed by the inquirer does not constitute a court cost or an expense of litigation. The policy is not required by the court, does not have any direct effect on the client’s representation, and does not affect the outcome of the litigation.. . .
“[T]he proposed litigation insurance only provides a direct benefit to the attorney. As the inquirer has described it, claims on the insurance policy would only include the lawyer as a beneficiary, and not the client. To the extent that the insurance would benefit the client, the benefits are indirect and relate to existing obligations of the lawyer, such as the duties of competence, diligence, and the avoidance of conflicts of interest.”
Consequently, the opinion said, the insurance is a business expense, not a court cost.
The insurance was developed and is offered by Miami attorneys Justine Leto and Larry Bassuk. They argued, at the PEC’s June meeting, that the product benefits clients because attorneys will be less likely to cut costs for tests or experts, it protects clients if the other side attempts to drag out proceedings, it allows smaller firms to take contingency cases, and it improves access to the courts because attorneys can undertake riskier cases.
The cost is a finance fee plus 7 percent of the expected litigation costs, and the attorney must sign up for the insurance with the estimated expense within 90 days of service of process. The policies are available online at levelinsurance.com.
The Professional Ethics committee is charged with the duty of answering ethics inquiries from members of the Bar concerning the inquirer’s own proposed conduct. The committee reviews informal advisory opinions issued by Florida Bar ethics department attorneys. Additionally, the committee publishes formal advisory opinions to guide Bar members in interpreting and applying the ethics rules. A formal opinion is published in accordance with Board of Governors approved procedures as a proposed advisory opinion to which Bar members may submit comments.
