Can a law firm doing the title search in a real estate closing accept a share of the title insurance premium from the real estate company, on top of charging the client for the closing?

Plain-English summary

A real estate company asked a law firm to represent its customers in closings (assuming the company honored borrower attorney-preference rules under S.C. Code Ann. § 37-10-102). The real estate company, not the firm, would issue the title insurance, with the firm assisting in searching and certifying title. The firm would be paid 20 percent of the insurance premium for its title work, in addition to charging the client for closing services and the title search. The committee was asked whether the arrangement violated the rules, particularly Rule 5.4.

The committee concluded Rule 5.4 was not violated. Citing Doe v. McMaster, it noted that a title company may earn money for issuing a policy if it is qualified and properly licensed and a lawyer directly supervises the title search and document preparation, and that the firm may be paid reasonable compensation for title-agent work it does. The central limit is that the firm may not double bill: it cannot use its share of the premium to obtain extra pay for title-search work the client is already paying for. Rule 1.5(a) requires reasonable fees, so making the client pay for title-search work the real estate company already pays for would be excessive, and Rule 1.4 requires full disclosure of the lawyer's financial involvement in the transaction.

The committee stressed protecting the client's interests: the title insurance terms must be fair and no less advantageous than if the firm issued the policy, and the client must be told of the right to obtain title coverage elsewhere. There is nothing per se wrong with the firm being paid a percentage of the premium for legal work, but full disclosure is required, the payment must be reasonable, and there must be no double compensation. Drawing on McNair v. Rainsford and Opinion 94-08, the committee discussed when a lawyer may represent multiple parties to a closing (no negotiation required, no jeopardizing problem, full disclosure of potential conflict, parties' understanding of the right to other counsel and agreement) and the intermediary role under Rule 2.2, and noted Rule 1.8(f)'s requirements for accepting compensation from someone other than the client (client consent after consultation, no interference with independent judgment, and protection of client information under Rule 1.6). It observed that Texas Opinion 408 (discussed in Opinion 525) and Illinois Opinion 93-01 accord with these views.

In practice

Under the South Carolina rules as they stood at the time of the opinion, the committee held that a firm may accept a percentage of a title insurance premium for title-agent work without violating Rule 5.4, so long as the title work is properly supervised, the firm does not double bill the client for work the real estate company already pays for (Rule 1.5(a)), and the firm fully discloses its financial interest and the client's options to obtain coverage elsewhere (Rules 1.4, 1.7, 1.8(f), and 2.2). South Carolina revised its Rules of Professional Conduct effective 2005, and Rule 2.2 (lawyer as intermediary) was later eliminated; verify the current rules before relying on the specific provisions cited.

Common questions

Q: Does sharing a title insurance premium with a real estate company violate Rule 5.4?

A: The committee concluded no: there is nothing per se wrong with a firm being paid a percentage of the premium for legal title work, provided the work is properly supervised and the other conditions are met.

Q: Can the firm charge the client for the title search and also take a cut of the premium for it?

A: The committee concluded no double billing is allowed: under Rule 1.5(a) the firm may not make the client pay for title-search work the real estate company already pays the firm to do, as that would be excessive.

Q: What disclosures are required?

A: The committee concluded the firm must fully disclose its financial involvement (Rule 1.4), the potential for conflict and the right to other counsel (Rule 1.7, Rule 2.2), the client's right to obtain title coverage elsewhere, and must satisfy Rule 1.8(f) when accepting compensation from someone other than the client.

Q: Must the title insurance terms be fair to the client?

A: The committee concluded yes: the terms must be fair and no less advantageous to the client than if the firm itself issued the policy.

Background and rules framework

The opinion interprets South Carolina RPC 5.4 (professional independence; sharing fees), 1.5(a) (reasonable fees), 1.4 (disclosure), 1.7 (conflicts), 1.8(f) (compensation from a third party), and 2.2 (lawyer as intermediary), corresponding to the like-numbered Model Rules. The committee relied on Doe v. McMaster, McNair v. Rainsford, its Opinion 94-08, Texas Opinions 408 and 525, and Illinois Opinion 93-01.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 5.4 / Model Rule 5.4: professional independence and fee sharing.
• South Carolina RPC 1.5(a) / Model Rule 1.5(a): reasonable fees; no double billing.
• South Carolina RPC 1.4, 1.7, 1.8(f), 2.2 / Model Rules: disclosure, conflicts, third-party compensation, and the intermediary role.

Cases:

• Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (S.C. 2003), lawyer supervision of title search and documents.
• McNair v. Rainsford, 330 S.C. 332, 499 S.E.2d 488 (Ct. App. 1998), conflicts in multi-party closings.

Other opinions cited:

• S.C. Bar Ethics Advisory Op. 94-08; Texas Prof. Ethics Comm. Ops. 408 and 525; Illinois State Bar Ass'n Revised Op. 93-01.

See also

• SC Bar Ethics Op. 02-16: When a lawyer who owns the seller helps the buyer at closing
• ABA Formal Op. 474: Referral fees and conflicts of interest

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-03-07/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 03-07

Facts
Law Firm is requested by a local real estate company to represent its customers in real estate closings. (It is assumed that real estate company is complying with S.C. Code Ann. § 37-10-102 with respect to honoring the borrower’s decision concerning attorney preference.) Real estate company, not Law Firm, will issue the title insurance, with Law Firm assisting in “searching and certifying the title.” Law Firm will be paid 20 percent of the insurance premium for its share of the title work in addition “to the amount we will charge the client for our closing services and the title search.”

Question
Does the foregoing proposed agreement violate any of the Rules of Professional Conduct, particularly Rule 5.4?

Summary
Rule 5.4 is not violated by the foregoing proposed agreement. The foregoing agreement is ethical provided there is proper supervision of title matters by the law firm, no excessive compensation to the law firm in violation of Rule 1.5, and appropriate disclosure to both the local real estate company and the client-customers under Rules 1.4, 1.7, 1.8(f) and 2.2.

Discussion
The real estate closing company is entitled to make money for issuing a title policy assuming the company is qualified, properly licensed, and behaving properly under Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (2003) (title company’s search and preparation of title documents for the lender must be directly supervised by a lawyer). The law firm is entitled to be paid reasonable compensation for title agent-related work it does concerning the issuance of title coverage.

By no means, however, is the law firm entitled to double bill for the same work. The law firm is not entitled to use its ability to share in the insurance premium as a means of receiving extra compensation for title search work already being paid for by its client-customer. Rule 1.5(a) requires that fees be reasonable. If the client customer is made to pay for Law Firm “title search work” for which the firm has already been paid by the real estate company, the compensation would be excessive. Additionally, Rule 1.4 requires that the client be given full disclosure concerning the lawyer’s financial involvement in the real estate transaction.

The client’s interests need to be protected. The terms concerning the title insurance available through the local real estate company must be fair. Those terms may not be less advantageous to the client-customer than they would be were the law firm issuing the policy. There is nothing per se wrong with the firm being paid by the real estate company a percentage of the premium for legal work done. Full disclosure is required as well. The propriety of the proposed arrangement also presumes that the client-customer is informed of his or her right to obtain title coverage elsewhere and that the payment to Law Firm is reasonable, fully and properly disclosed to the client-customer and does not involve the client-customer paying (or the law firm receiving) double compensation for the same work.

In McNair v. Rainsford, 330 S.C. 332, 345, 499 S.E.2d 488, 495 (Ct. App. 1998), a case involving alleged conflicts of interest in the handling of a real estate transaction, the Court of Appeals relied on Ethics Advisory Opinion No. 94 08 for the proposition that:
an attorney may represent all three parties [buyer, seller and lender] to a real estate closing without violation of the RPC provided, however, no negotiation is required, no problem has arisen which may jeopardize the closing, no party is relying on the attorney for substantive advice about how or whether to proceed, there has been full disclosure of the potential for conflict to all the parties to the closing, all of the parties understand their right to seek other legal counsel, and all parties agree. Additionally, the attorney must reasonably believe the representation will not adversely affect any part of the closing.

In Rainsford, the Court of Appeals went on to discuss the possible applicability of Rule 2.2 in the real estate closing context:
A lawyer acts as intermediary under Rule 2.2 when the lawyer represents two or more parties with potentially conflicting interests. Rule 2.2 cmt. at p. 163, Rule 407, SCACR. A key factor in defining the relationship is whether the parties share responsibility for the lawyer's fee, but the common representation may be inferred from other circumstances. Id. Because confusion can arise as to the lawyer's role where each party is not separately represented, it is important the lawyer make clear the relationship. Id. Rainsford, 330 S.C. at 347, 499 S.E.2d at 496.

In light of Rainsford, the disclosure requirements of Rules 1.4 and 1.7, and the potential applicability of Rule 2.2, it is imperative that any closing attorney faced with the subject fact situation charge only a reasonable fee that is fully disclosed to all concerned. Rule 1.8(f) also requires full disclosure:
A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) The client consents after consultation;
(2) There is no interference with the lawyer's independence of professional judgment or with the lawyer client relationship; and
(3) Information relating to representation of a client is protected as required by RPC 1.6.

The Committee also notes that the following findings by other state ethics advisory panels are in accord with the views expressed herein:
Texas Professional Ethics Committee Ethics Opinion 408 involved an attorney's dual representation of parties to a real estate transaction, holding that an attorney may accept a portion of a title insurance premium in a multi party real estate transaction, but that the attorney is required to fully disclose the possible adverse effects of multiple representation to each of the prospective clients and only proceed with such representation when each client has consented after such disclosure and it is obvious that the attorney can adequately represent each client's interest. Opinion 408 is not available on Westlaw, but is discussed in Texas Professional Ethics Committee Ethics Opinion 525, which is. See 1998 WL 130065 (Tex. Prof. Eth. Comm.)

Illinois State Bar Association Revised Op. 93-01 likewise found that lawyers may receive compensation from lay agencies for doing title work without violating Rule 5.4 or other disciplinary requirements; full disclosure is mandatory. See 1994 WL 904187 (Ill. St. Bar. Assn.)