My client's health insurer says it has a lien on the settlement for the medical bills it paid, but my client tells me not to pay it. Do I follow the client or the insurer?

Plain-English summary

The inquiring attorney brought suit for a client injured in an automobile accident. The client's health insurer paid all the client's medical bills and notified the attorney that it was placing a "lien" on the case proceeds equal to the bills it paid. The attorney had not undertaken a contractual obligation to pay the insurer from the proceeds. After the case settled, the client directed the attorney not to pay the health insurer. The attorney asked whether he or she must pay the insurer or honor the client's request.

The panel located the dilemma in the tension between a lawyer's duty under Rule 1.2 to abide by the client's decisions concerning the objectives of representation and the lawyer's duty under Rule 1.15 regarding funds in which a client or third person has a legally enforceable interest. Rule 1.15(b) imposes three duties when a lawyer holds funds in which a third person has an interest: to promptly notify, to promptly deliver, and to fully account. Whether the insurer has such an interest, the panel explained, is a question of substantive law.

The panel drew a line between a legally enforceable interest and a mere claim. If, under applicable law, the third party has a right to the funds (for example, by a statutory lien or a facially valid assignment), the lawyer must protect that interest by notifying the third party, delivering the funds, and accounting; a lawyer may not follow a client's instruction to disregard such an interest, and breach of that duty may constitute conversion. If the third party has only a mere claim that is neither an assignment nor a perfected statutory lien, the client's entitlement to the funds is not destroyed, and the lawyer may follow the client's instructions while informing the creditor to assert the claim directly against the client.

The panel advised the attorney to determine, under applicable law (for example by examining the client's insurance policy), whether the insurer had an interest. If so, the lawyer must notify, pay, and account. If the insurer had only a claim, the lawyer may disburse to the client with notice to the insurer, and the panel recommended notifying both the insurer and the client that the funds will be disbursed to the client in 30 days unless the lawyer receives notice of a legally enforceable interest. As to the substantive-law issues, the panel declined to render an advisory opinion pursuant to Panel Rule 2(g).

Currency note

This opinion was issued in 1996, after the Rhode Island Supreme Court adopted the Model Rules of Professional Conduct effective November 15, 1988, and it applies Rules 1.15 and 1.2 as originally adopted. The Rhode Island Supreme Court later revised the Rules of Professional Conduct in 2007 as part of the nationwide Ethics 2000 process, which renumbered and amended several provisions. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule mentioned here.

Common questions

Q: Can a lawyer follow a client's instruction not to pay a health insurer's lien?

A: Under this opinion, it depends on the nature of the insurer's interest. If the insurer has a legally enforceable interest such as a statutory lien or assignment, the lawyer must pay it; if the insurer has only a mere claim, the lawyer may follow the client after giving notice.

Q: What does the lawyer do when a claim is merely asserted, not perfected?

A: The panel said the lawyer may disburse to the client with notice to the insurer, and recommended telling the insurer and the client that the funds will be paid to the client in 30 days unless the lawyer receives notice of a legally enforceable interest.

Q: Did the panel decide whether this insurer actually had a lien?

A: No. The panel treated whether the insurer had an interest as a question of substantive law and declined to render an advisory opinion on it under Panel Rule 2(g).

Q: What is the risk of ignoring a valid lien?

A: The panel noted that a lawyer may not follow a client's instruction to disregard a facially valid assignment or statutory lien, and that breach of the duty to protect the third party's interest may constitute conversion by the lawyer.

Background and rules framework

The opinion applies Rule 1.15 (Safekeeping Property) and Rule 1.2 (Scope of Representation), corresponding to Model Rules 1.15 and 1.2. The panel read Rule 1.2's duty to follow the client's objectives against Rule 1.15(b)'s duties to notify, deliver, and account for funds in which a third person has a legally enforceable interest, resolving the tension by distinguishing an enforceable interest from a mere claim. The panel cited sibling authorities applying the same distinction and deferred the underlying substantive-law determination to the lawyer.

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property)
• MR 1.2 (scope of representation and allocation of authority)
• RI RPC 1.15
• RI RPC 1.2

Statutes:

• None cited.

Cases:

• Unigard Insurance Co. v. Tremont, 430 A.2d 30 (Conn. Super. Ct. App. Sess. 1981), lawyer's duty to protect a third party's statutory-lien interest in funds.

Other opinions cited:

• Alaska Bar Association Opinion No. 92-3 (6/1/92): handling disputed third-party claims to settlement funds.
• California Bar Opinion 1988-101: same.
• Los Angeles County Bar Association Opinion No. 478 (7/18/94): same.

See also

• RI EAP Op. 95-57: Paying an Insurer With No Lien
• RI EAP Op. 95-12: Disputed Medical Lien Funds
• RI EAP Op. 95-27: Medical Lien From Prior Counsel

Source

• Landing page: https://www.courts.ri.gov/attorney-resources/Pages/Ethics-Advisory-Panel-default.aspx
• Original PDF: https://www.courts.ri.gov/Opinions/EAP%2095-60.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

Final

ETHICS ADVISORY PANEL
OPINION # 95-60, - REQUEST # 637
ISSUED - MARCH 14, 1996

Facts:

The inquiring attorney brought suit on behalf of a client who was injured in an automobile accident. The client's health insurance company paid all the client's medical bills and notified the inquiring attorney that it was placing a "lien" on the proceeds of the case in an amount equal to the medical bills it paid. The attorney did not undertake a contractual obligation to pay the insurance company out of the proceeds. The case was settled, however, the client directed the inquiring attorney not to pay the health insurer.

Issue Presented:

Is the inquiring attorney obligated to pay the health insurer from the settlement proceeds or to respect the client's request?

Opinion:

Under the circumstances described here, if the health insurer has a legally enforceable interest in the funds, the inquiring attorney must notify the health insurer and pay over the funds due it. If the health insurer has a mere claim to the funds, the Panel recommends the attorney notify the health insurer that the money will be disbursed to the client thirty (30) days hence unless he/she receives notice that the health insurer has a legally enforceable interest in the funds.

Reasoning:

The inquiring attorney's dilemma is reflected in the juxtaposition of a lawyer's obligation to abide by his or her client's decisions concerning the objectives of representation (Rule 1.2) and a lawyer's obligation under Rule 1.15 with respect to funds in which a client or a third person has a legally enforceable interest (hereinafter "Interest"). Rule 1.15(b) imposes three duties on the lawyer receiving funds in which a client or a third person has an interest: the duty to promptly notify, the duty to promptly deliver and the duty to fully account. In the instant situation, it is unclear whether the health insurer has an interest in the funds. Whether or not the health insurer has such an interest is a question of substantive law. It has been held that if, under applicable law, the third party has a right to the funds by virtue of a statutory lien for example, the lawyer has a duty to protect the third party's interest by notifying the third party, delivering the funds and fully accounting to him. Breach of that duty may constitute conversion by the lawyer. See Unigard Insurance Co. v. Tremont 430 A2d 30 (Conn Super Ct App Sess, 1981).

A lawyer may not follow a client's instructions to disregard a facially valid assignment or statutory lien in favor of the client's creditor. The equivalent body to this panel in other jurisdictions has opined that in such a case the lawyer should advise the client that he/she will withhold the disputed funds and, unless the dispute can be resolved amicably, deposit them into court. See Alaska Bar Association Opinion No. 92-3 (6/1/92), California Bar Opinion 1988-No. 101; and Los Angeles County Bar Association Opinion No. 478 (7/18/94).

If, however, the lawyer merely is aware of a claim against the funds on the part of a third party, his/her duties are less clear. It has been held that notice of a third party claim that is neither an assignment nor a perfected statutory lien does not destroy the client's entitlement to the funds. See Alaska Bar Opinion above. The Alaska Bar Opinion advises that the lawyer receiving such notice may follow the client's instructions with respect to the funds, but should inform the creditor that the claim should be asserted directly against the client. Id.

The Panel advises the inquiring attorney to determine whether the health insurer has an interest in the settlement funds under applicable law. Perhaps an examination of the client's health insurance policy will aid in that determination. If the lawyer determines that the health insurer has such an interest, the lawyer must notify the health insurer, pay over the funds in which the health insurer has an interest and render a full accounting.

If, on the other hand, the lawyer determines that under applicable law, the health insurer does not have an interest in the funds by virtue of an assignment or a lien, but merely a claim thereto, the inquiring attorney may disburse the funds to the client with notice to the health insurer. The Panel recommends that the inquiring attorney notify the health insurer and the client that he/she will disburse the funds to the client thirty (30) days hence unless he/she receives notice that the health insurer has a legally enforceable interest in the funds.

As to substantive law issues, the Panel declines to render an advisory opinion pursuant to Panel Rule 2(g).