Can lawyers own a corporation that processes insurers' Second Injury Fund claims, as long as it only does paperwork and refers any litigation out?

Plain-English summary

Partners in a law firm planned to form a corporation to process claims for insurance carriers seeking recovery from the Second Injury Fund. The corporation would only do paper-processing work and would not decide how to handle disputed claims; if a claim required litigation, the corporation would retain legal counsel and end its involvement. The inquiry asked whether lawyers owning or operating the corporation would violate the Rules.

The committee concluded that, provided the corporation's activities were purely ministerial, the ownership and operation were permitted. It analyzed three issues. First, on unauthorized practice: corporations may not practice law in South Carolina (S.C. Code § 40-5-320; State v. Buyer Services Co.), and a lawyer may not aid the unauthorized practice of law (Rule 5.5(b)). Applying the definition of the practice of law from In re Duncan and the line drawn in State ex rel. Daniel v. Wells (where filling out and filing forms was not the practice of law but appearing at hearings was), the committee found the corporation's activities would not be unauthorized practice so long as they were limited to preparing forms to file claims with the Second Injury Fund; rendering legal advice to the carriers, negotiating with Fund representatives, or appearing at hearings or other proceedings would be improper. Second, on solicitation: in-person solicitation is improper under Rule 7.3(a), and the committee said it would be improper solicitation if the corporation retained its own owner-lawyers to handle litigation, suggesting it would be wiser for the carriers themselves to select litigation counsel. Third, on business transactions with clients: if the owner-lawyers also represented any of the insurance companies using the corporation's services, the rules on business transactions with clients applied, and the committee directed attention to Rule 1.8(a), which requires a written explanation of the transaction and the client's written consent.

Currency note

This opinion was issued in 1990, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. 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 Treat this page as historical context, not current guidance.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, deadline, or requirement mentioned here.

Common questions

Q: Could the lawyers own a Second Injury Fund claims-processing corporation?

A: The committee said yes, if the corporation's activities were purely ministerial, limited to preparing forms to file claims with the Fund.

Q: What would cross into unauthorized practice?

A: The committee said rendering legal advice to the carriers, negotiating with Fund representatives, or appearing at hearings or other legal proceedings would be improper corporate practice of law.

Q: Could the corporation hand its litigation to the owner-lawyers?

A: The committee said that would be improper in-person solicitation under Rule 7.3(a); it suggested the insurance carriers, not the corporation, select litigation counsel.

Q: What if the lawyers also represent the insurers using the corporation?

A: Then the business-transactions-with-clients rules apply. The committee pointed to Rule 1.8(a), which requires a written explanation of the transaction and the client's written consent.

Background and rules framework

The opinion applied Rule 5.5(b) (assisting unauthorized practice), Rule 7.3(a) (in-person solicitation), and Rule 1.8(a) (business transactions with clients), corresponding to Model Rules 5.5, 7.3, and 1.8, together with S.C. Code Ann. § 40-5-320 on corporate practice of law.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 5.5(b) / Model Rule 5.5: a lawyer shall not assist a nonlawyer in the unauthorized practice of law.
• South Carolina RPC 7.3(a) / Model Rule 7.3: in-person solicitation.
• South Carolina RPC 1.8(a) / Model Rule 1.8: business transactions with clients require written disclosure and consent.

Statutes:

• S.C. Code Ann. § 40-5-320 (1986): corporations may not practice law.

Cases:

• State v. Buyer Services Co., 292 S.C. 426, 357 S.E.2d 15 (S.C. 1987); In re Duncan, 83 S.C. 186, 65 S.E. 210 (S.C. 1909); State ex rel. Daniel v. Wells, 191 S.C. 468, 5 S.E.2d 181 (S.C. 1939).

See also

• SC Bar Ethics Op. 90-03: A Lawyer Co-Owning a Consulting Corporation
• SC Bar Ethics Op. 90-09: A Lawyer-Insurance Agency Estate-Planning Arrangement

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-90-12/

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 90-12

Partners in a law firm plan to form a corporation to process claims on behalf of insurance carriers for recovery from the Second Injury Fund. The corporation would only perform paper processing duties and would not make decisions as to how to handle any disputed claims. In the event any claim required litigation, the corporation would retain legal counsel and end its involvement.

Question:
Does the ownership or operation of the corporation by the lawyers violate the Rules of Professional conduct?

Summary:
Provided the corporation's activities are purely ministerial, the ownership and operation of the corporation is permitted under the Rules of Professional Conduct.

The activities of the proposed corporation do not constitute the unauthorized practice of law so long as they are limited to the preparation of forms to file claims with the Second Injury Fund.

However, the giving of legal advice to the insurance carriers, negotiation with representatives of the Second Injury Fund, or appearances in hearings or other legal proceedings would be improper. The corporation should also not be used as a means of in-person solicitation of legal business for the lawyers who establish the corporation. In addition, if any of the insurance companies that employ the services of the new corporation are also clients of the lawyers, the lawyers should comply with the rules regarding business transactions with clients.

Opinion:
To the Committee the proposed corporation raises three issues: First, would the corporation be engaged in the unauthorized practice of law? Second, does the proposal involve improper solicitation of legal business? Third, would the lawyers who form the corporation be in violation of rules governing business transactions with clients?

(1) Unauthorized practice of law. Practice of law by corporations is prohibited in this state. S.C. Code Ann. 40-5-320 (1986); State v. Buyer Services Co., 292 S.C. 426, 357 S.E.2d 15 (1987) (commercial title company preparing real estate documents). It is ethically improper for a lawyer to aid a nonlawyer in the unauthorized practice of law. Rule 5.5(b). Thus, if the activities of the proposed corporation constitute the practice of law, it would be acting in violation of South Carolina law and the lawyers would be ethically prohibited from owning stock in the corporation.

The practice of law has been defined by our Supreme Court as follows:
"According to the generally understood definition of the practice of law in this country, it embraces the preparation of pleadings and other papers incident to actions and special proceedings and the management of such actions and proceedings on behalf of clients before judges and courts, and in addition conveyancing, the preparation of legal instruments of all kinds, and in general all advice to clients and all action taken for them in matters connected with the law." In re Duncan, 83 S.C 186, 189, 65 S.E. 210, 211 (1909).

The practice of law is not limited to court appearances, but includes a variety of out-of-court activities. In State v. Buyers Service Co., 292 S.C. 426, 357 S.E.2d 15 (1987) the Supreme Court held that the preparation of closing documents, handling of real estate closings, preparation of abstracts of title, and even the recording of instruments constitute the unauthorized practice of law by a commercial title company. See also 1977 Op. Att'y Gen. 77-384 (activities of public adjusters constitute the unauthorized practice of law).

On the other hand, activities which are ministerial and non-legal do not constitute the unauthorized practice of law. For example, in State ex rel. Daniel v. Wells, 191 S.C. 468, 5 S.E.2d 181 (1939), the Supreme Court held that an insurance company representative who appeared at worker's compensation hearings on behalf of his employer was engaged in the unauthorized practice of law, but that other work performed by the employee was not: "Respondent states in his argument that in addition to this work he 'investigates the circumstances surrounding the injury, which gives rise to the claim, makes a report to the home office, fills out forms as required and prepared by the Commission, files them with the Commission, notifies the Commission if the Company has decided that the claim is not compensable and is to be denied.' We do not think that the quoted acts would constitute the practice of law". Id. at 481, 5 S.E.2d at 186-87. See also 1977 Op. Att'y Gen. 77-384 (activities of public adjusters that go beyond mere appraisal constitute the unauthorized practice of law). It appears to the Committee that the activities of the proposed corporation do not constitute the unauthorized practice of law so long as they are limited to the preparation of forms to file claims with the Second Injury Fund. However, the rendering of legal advice to the insurance carriers, negotiation with representatives of the Second Injury Fund, or appearances in hearings or other legal proceedings, would be improper.

(2) Solicitation. In-person solicitation of business by lawyers is ethically improper. Rule 7.3(a) The inquiry letter states: "In the event any claim required litigation, the corporation would retain legal counsel and end its involvement." It would, in the opinion of the Committee, constitute improper solicitation if the corporation retained the lawyers who owned the corporation to handle such legal work. Indeed, the Committee believes it would be wiser for the insurance carriers rather than the corporation to select counsel to handle litigation matters.

(3) Business transactions with clients. If the lawyers who are forming the corporation also represent any of the insurance companies that will be using the corporation's services, the rules governing business transactions with clients should be observed. Under the Rules of Professional Conduct, a business transaction between a lawyer and client is permitted provided certain requirements are met. Attention is directed to Rule 1.8(a). Among other provisions, the rule requires a written explanation of the business transaction and written consent by the client.