Can law firm principals own a life insurance agency and refer their estate-planning clients to it for commissions?

Plain-English summary

A law firm's estate-planning clients often asked for advice about life insurance. The firm's principals proposed to form a life insurance agency in which they would hold at least a 50% interest (the other owners being licensed insurance sellers), refer firm clients to the agency when an attorney thought a purchase appropriate, and share in the commissions, with any referring attorney making full written disclosure of the firm's ownership. The inquiry asked whether forming the agency, the principals' ownership, and sharing commissions on policies sold to firm clients would violate the Rules.

The committee concluded that, under the Rules, an attorney may own an interest in a life insurance agency and refer clients to it, but only with full disclosure of all relevant factors that might create a conflict, with the terms set out in writing and the client's written consent, and with the attorney constantly acting in the client's best interest without regard to his own financial interest. It grounded the conflict analysis in Rule 1.7 (a representation materially limited by the lawyer's own interest, permissible only if the lawyer reasonably believes there will be no adverse effect and the client consents after consultation) and warned that loyalty is impaired when the lawyer's other interests foreclose alternatives otherwise available to the client. It applied Rule 1.8 to the business transaction (fair and reasonable terms, full written disclosure, opportunity to seek independent counsel, written consent) and Rule 7.1 to any misleading communication. The committee drew an analogy to attorney-owned title insurance agencies (citing its own Advisory Opinion 85-04), noting the ethical considerations are similar. It emphasized that the Rules' test is subjective, whether the attorney believes he can represent the client's best interests despite the conflict, and that doing so would be difficult, with ABA Informal Opinion 556 (1962) concluding it would not be possible as a practical matter; on disclosure it cited an Ohio opinion requiring disclosure of the attorney's beneficial interest, compensation, any indemnity agreement, and fees or commissions, and warned of a possible excessive-fee problem under Rule 5 if the attorney takes both a legal fee and a commission. It noted that agency-to-firm referrals could raise solicitation concerns under Rule 7.3 (though the rule's misrepresentation and litigation-promotion concerns were not implicated here), that the attorney may not assist agency staff in the practice of law under Rule 5.5 (with the working-knowledge exception likely covering insurance agents), that where practice-of-law lines fall is a question of law for the Unauthorized Practice of Law Committee, and that Rule 5.4's bar on fee sharing with nonlawyers could apply if the two businesses were not sufficiently separated.

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 firm's principals own a life insurance agency and refer clients to it?

A: The committee said it appears permissible, but only with full written disclosure of conflicts, the client's written consent, and the lawyer constantly acting in the client's best interest despite his financial stake.

Q: Can the lawyer actually maintain undivided loyalty in that arrangement?

A: The committee said the Rules' test is subjective and that doing so would be difficult; ABA Informal Opinion 556 concluded it would not be possible as a practical matter.

Q: What did the business-transaction rule require?

A: Under Rule 1.8, the committee said the terms must be fair and reasonable, fully disclosed in writing the client can understand, with a chance to consult independent counsel, and the client's written consent.

Q: What other rules could the arrangement implicate?

A: The committee flagged Rule 7.1 (no misleading claims), Rule 7.3 (possible solicitation on agency-to-firm referrals), Rule 5.5 (not assisting unauthorized practice), and Rule 5.4 (no fee sharing with nonlawyers if the businesses are not separated).

Background and rules framework

The opinion applied Rule 1.7 (conflicts), Rule 1.8 (business transactions with clients), Rule 5.4 (fee sharing and independence), and Rule 7.1 (communications), with references to Rules 7.3 and 5.5, corresponding to Model Rules 1.7, 1.8, 5.4, 7.1, 7.3, and 5.5. The committee analogized to attorney-owned title insurance arrangements.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.7 / Model Rule 1.7: conflict where representation is materially limited by the lawyer's own interest.
• South Carolina RPC 1.8 / Model Rule 1.8: business transactions with clients require fair terms, written disclosure, and written consent.
• South Carolina RPC 5.4 / Model Rule 5.4: no fee sharing with nonlawyers; RPC 7.1 / Model Rule 7.1: no misleading communications; RPC 7.3, 5.5 referenced.

Other opinions cited:

• SC Bar Advisory Opinion 85-04 (2/86); ABA Informal Opinion 556 (May 31, 1962); Ohio Bar Opinion 37 (July 3, 1989).

See also

• SC Bar Ethics Op. 90-09: A Lawyer-Insurance Agency Estate-Planning Arrangement
• SC Bar Ethics Op. 90-12: Lawyers Owning a Claims-Processing Corporation

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-90-16/

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 90-16

A law firm's estate planning clients frequently ask for advice about life insurance, including whether to purchase life insurance, the type of policy that should be purchased, and analysis of competing proposals from life insurance agents.

The principals of the law firm propose to form a life insurance agency in which they would have at least a fifty percent (50%) ownership interest, the other owners being licensed to sell life insurance in the State of South Carolina. Clients of the law firm will be referred to the agency if an attorney of the firm believes the purchase of life insurance is appropriate. Commissions on sales of life insurance policies will be paid to the agency and the principals of the law firm will share in those commissions. Any attorney who refers a client to the agency will make full written disclosure of its ownership.

Question:
Would the establishment of the agency, participation in its ownership by the principals of the law firm and the sharing of life insurance commissions on policies sold to clients of the law firm violate the Rules of Professional Conduct?

Summary:
Under the Rules of Professional Conduct, it would appear to be permissible for an attorney to own an interest in a life insurance agency and refer clients thereto. The attorney who refers a client to the insurance agency must make full disclosure of all relevant factors which might cause the attorney to have a conflict of interest. The terms of the client's dealing with the insurance agency must be set forth in writing and the client's consent to the arrangement must be in writing. The attorney must constantly act in the best interests of the client without regard to the attorney's own financial interest in profiting from the arrangement. This will be difficult at best, and as a practical matter, may not be possible. In addition, certain other ethical principles, more fully set forth in the full text of the opinion, may affect the arrangement.

Opinion:
An attorney may act as a evaluator by examining a client's legal affairs and reporting about them to the client or others. If an attorney has a conflict of interest, where the representation of a client may be materially limited by the attorney's own interest, the attorney may represent the client so long as he believes that there will be no adverse effect on his relationship with the client and if the client consents after consultation. An attorney should be loyal to his client. Loyalty is impaired when an attorney cannot consider, recommend, or carry out an appropriate course of action for the client because of the attorney's other responsibilities or interests. The conflict, in effect forecloses alternatives that would otherwise be available to the client. An attorney may not allow related business interests to affect his representation, for example, by referring clients to an enterprise in which the attorney has an undisclosed interest. Rule 1.7.

An attorney should not enter into a business transaction with the client unless the terms of the transaction are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client, the client is given a reasonable opportunity to seek the advice of independent counsel, and the client consents in writing thereto. Rule 1.8.

An attorney shall not make a false or misleading communication about the attorney or about the attorney's services. Communication is false and misleading if it is likely to create an unjustified expectation about the results he can achieve. Rule 7.1.

There appears to be no basic difference between furnishing life insurance products to clients through a life insurance agency owned by an attorney, and furnishing title insurance through a title insurance agency owned by an attorney. Although it is true that in some cases title insurance may be required by a third party, owner's title insurance is almost never so required, and the ethical considerations appear to be similar. In both cases, the client must be fully informed as to possible conflicts of interest, and consent in writing thereto. Many ethics opinions have been written in other states concerning title insurance; some states prohibit the sale of title insurance by attorneys, and others allow it. In Advisory Opinion 85-04 (2/86), this committee opined that an attorney could represent both an individual client and a title insurance company and receive commissions on title policies sold to the client.

Under the Rules of Professional Conduct, it would appear that full disclosure by the attorney of all material matters and written consent by the client thereto will allow the arrangement described above to be carried out; however, the attorney must constantly act in the best interests of the client without regard to the attorney's own financial interest in profiting from the arrangement. The test of the Rules of Professional Conduct is a subjective one: does the attorney believe that he will be able to represent the best interests of his client in spite of the attorney's conflicting interest? It is left entirely up to the attorney to decide if he can. Doing so will be difficult at best, and the American Bar Association, in Informal Opinion 556 (5-31-62) concluded that as a practical matter it would not be possible. As to what constitutes full disclosure under the circumstances, a 1989 opinion of the Ohio Bar (Ohio Opinion #37, 7-3-89) (concerning title insurance) stated that an attorney must disclose his beneficial interest in the insurance company, compensation paid to the insurance company, any indemnity agreement that the attorney has with the company and the amount of fees or commission to be paid to the attorney, together with any impact such arrangement might have on the attorney's professional judgment. The opinion also suggested that an attorney might receive an excessive fee (prohibited by Rule 5) if he receives a fee for legal services provided for the client together with a commission from the insurance company.

The facts show that referrals will be made from the law firm to the insurance agency, but are silent as to whether referrals will be made from the insurance agency to the law firm. It is possible that such referrals could constitute personal solicitation, which is prohibited under Rule 7.3, although the rule does not directly address a similar situation. The purpose of the rule appears to be the prevention of misrepresentation in advertising, as well as discouraging the promotion of litigation by attorneys. Neither of these concerns are apropos under the present factual situations, so long as the attorney in fact makes no misleading statements to the client, as no litigation is involved.

The attorney may not assist any employee or agent of the insurance agency to engage in any part of the practice of law, as such conduct is prohibited under Rule 5.5. The rule contains an exception for the provision of professional advice by attorneys to non-lawyers whose employment requires knowledge of law. This exception should apply to insurance agents, who must have a working knowledge of the laws involved in estate planning in order to perform their work.

Where the line is to be drawn between the practice of law and the work of the insurance agent is a question beyond the scope of this committee's duties as it involves a question of law, and should be referred to the Unauthorized Practice of Law Committee. Rule 5.4, which prohibits fee sharing with non-attorneys, could apply here, if the two businesses are not sufficiently separated. Members of the law firm should not represent that the insurance agency will provide better prices or service than other agencies without a factual basis for such claims. Rule 7.1.