Must a South Carolina lawyer obtain extra insurance for client trust funds that exceed the FDIC coverage limit, or place them across multiple banks?

Plain-English summary

A lawyer keeps a trust account at an FDIC-insured institution, reconciles it monthly, and maintains a ledger by client. Many clients have balances over $100,000 at any given time. The maximum FDIC coverage available per account at the time was $100,000, though the lawyer's research indicated that with properly maintained records each client's funds should be insured up to $100,000 per client. The lawyer asked whether Rule 1.15 obligates him to provide insurance above the FDIC maximum to discharge his duty to preserve client funds, and whether he breaches a duty if the bank fails and a client's funds over $100,000 are lost.

The committee answered no. A lawyer has only the obligation to take reasonable steps to protect client funds. Beyond FDIC insurance, numerous federal agencies regulate financial institutions to guard against bank failures, and those agencies have greater expertise than any individual attorney; it cannot be presumed they are not making reasonable efforts to safeguard the institutions. Nothing in the rules requires an attorney to maintain insurance on a trust account for amounts above the FDIC limit.

The committee read Rule 1.15(a) as defining the duty to hold client property in a separate account and to safeguard other property appropriately, with Comment [1] directing that a lawyer hold others' property with the care of a professional fiduciary (for example, keeping securities in a safe deposit box absent special circumstances). A fiduciary must act as if dealing with his own property, and the committee noted that money sitting in a trust account above $100,000 often includes the attorney's own fee and is there pending regulatory approval or the clearing of a check. Requiring a lawyer to insure funds over the FDIC limit or to place funds in numerous different banks would impose an unreasonable burden in most cases; insuring deposits above the limit is a business decision, not one of the safekeeping duties Rule 1.15 defines.

In practice

The opinion holds that, under the South Carolina rule as it stood at the time, Rule 1.15 requires a lawyer to take reasonable steps to safeguard client funds but does not require insuring trust funds above the FDIC coverage limit or distributing funds among multiple banks. The committee characterized the decision to insure deposits beyond the FDIC limit as a business decision outside the safekeeping duties the rule defines, and concluded a lawyer does not breach an ethical duty if a depository bank fails and a client's funds above the limit are lost.

Common questions

Q: Does Rule 1.15 require a lawyer to insure trust funds above the FDIC limit?

A: No. The committee concluded there is no requirement in the rules for an attorney to insure trust funds for amounts above the FDIC limit; the duty is to take reasonable steps to protect client funds.

Q: Must a lawyer spread large client balances across several banks?

A: No. The committee said the rules do not require placing funds in numerous different banks, and that imposing such a requirement would be an unreasonable burden in most cases.

Q: Is the lawyer liable if the bank fails and funds over the limit are lost?

A: The committee concluded a lawyer does not breach an ethical obligation in that situation, reasoning that federal agencies with greater expertise regulate the institutions and a lawyer's duty is only to act reasonably.

Background and rules framework

The opinion interprets South Carolina Rule 1.15 (safekeeping property), which corresponds to Model Rule 1.15. Rule 1.15(a) requires a lawyer to hold client property in a separate account and to identify and appropriately safeguard other property, and Comment [1] frames the duty as that of a professional fiduciary. The analysis turns on the difference between the rule's reasonable-safekeeping duty and a business judgment about insuring deposits.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15, 1.15(a) (safekeeping client and third-party property; duty of a professional fiduciary)

See also

• SC Bar Ethics Op. 08-03: Non-IOLTA Escrow for Big Deposits
• SC Bar Ethics Op. 05-15: Stale Uncashed Trust Check
• SC Bar Ethics Op. 06-08: Holding an LLC's Company Book

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-08-10/
• Original PDF: https://www.scbar.org/media/ku5fb5oq/08-10.pdf

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 08-10

SC Rules of Professional Conduct: 1.15

Facts

Lawyer maintains a trust account at an FDIC-insured financial institution. Lawyer conducts monthly reconciliations and maintains the account ledger by client. Many of the lawyer's clients have trust account balances in excess of $100,000 at any given time.

The maximum insurance coverage available per account through the FDIC in the event of the failure of the financial institution is $100,000; however, research into the FDIC requirements convinces the lawyer that if the records of the trust account are properly maintained, the funds of each client in his trust account should be insured at up to $100,000 per client.

Question

Does the lawyer have an obligation under Rule 1.15 or otherwise to provide insurance, over and above the maximum available pursuant to the FDIC, in order to discharge his duty to preserve client funds? In other words does a lawyer breach an obligation to his client if the depository bank fails and a client's funds in excess of $100,000 are lost?

Summary

No. The lawyer only has the obligation to take reasonable steps to protect client's funds. In addition to FDIC insurance, numerous federal agencies regulate financial institutions for the purpose of guarding against bank failures. It cannot be presumed that these federal agencies are not making reasonable efforts to safeguard these financial institutions, and it is certainly clear that these agencies have greater expertise than any given attorney. There is no requirement in the rules that the attorney maintain insurance on his trust account for amounts in excess of $100,000.

Opinion

Rule 1.15 (a) defines the ethical obligation to hold and disburse client funds. It states that a lawyer shall hold property of clients "in a separate account maintained in the state where the lawyer's office is situated or elsewhere with the consent of the client or third person. Other properties shall be identified as such and appropriately safeguarded." Comment [1] states that a lawyer should hold properties of others with the care required of a professional fiduciary. The sentence in Rule 1.15 (a) relating to "other property" seems to be discussed in comment [1] where it is stated that securities should be kept in a safe deposit box except when some other form of safekeeping is warranted by special circumstances.

When an individual acts as a fiduciary, he must act as if he were dealing with his own property. In cases wherein more than $100,000 is in the trust account, it is often the case that the attorney's own fee is in the trust account as well, and the reason that the money is in the trust account is that it is pending approval of a regulatory authority, or simply pending the check's clearing.

There is no requirement in the rules for an attorney either to insure funds in excess of $100,000 or to place funds in numerous different banks. To impose such a requirement would be an unreasonable burden on the practicing attorney in most cases. Rule 1.15 defines a lawyer's ethical duties with respect to safekeeping the property of clients and third-parties. Insuring bank deposits in excess of $100,000 is a business decision and is not specifically included in those duties.