May an insurance-defense firm use a target-budget system that pays the firm a bonus for handling cases under budget?

Plain-English summary

A lawyer described a proposed target-budget system for handling insurance-defense claims. Under the proposal, the firm would set a target budget for each claim and would receive a bonus for cases handled under budget, but would not forfeit fees for cases that went over budget. The system would not apply to certain cases, including where the insurer had issued a reservation of rights or where a claim exceeded policy limits.

Based on the facts as submitted, the committee was of the opinion that the proposal, as set out, raised no violations of the Rules of Professional Conduct, so long as the firm complies with RPC 1.8(f) regarding compensation from one other than the client.

Currency note

This opinion was issued in 1989, before the Washington State Bar Association's adoption of the 2006 revisions to the Washington 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 Treat this page as historical context, not current guidance.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: Is a target-budget bonus arrangement in insurance defense permissible?

A: Under this 1989 opinion, on the facts submitted the proposal raised no violations of the Rules of Professional Conduct, provided the firm complies with RPC 1.8(f).

Q: What condition did the committee attach?

A: Compliance with RPC 1.8(f), which governs accepting compensation from a third party (here, the insurer) for representing the client.

Q: Did the proposal apply to every case?

A: No. As described, it excluded certain cases, including those with a reservation of rights by the insurer or a claim exceeding policy limits.

Background and rules framework

RPC 1.7, Washington's version of ABA Model Rule 1.7, addresses conflicts of interest, and RPC 1.8(f), corresponding to ABA Model Rule 1.8(f), permits a lawyer to accept compensation from someone other than the client only if the client gives informed consent, there is no interference with the lawyer's independence of professional judgment or the client-lawyer relationship, and client information is protected. The committee found the budget-bonus proposal permissible on the submitted facts conditioned on compliance with RPC 1.8(f).

Citations and references

Rules of Professional Conduct:

• ABA Model Rule 1.7 (conflicts of interest: current clients)
• ABA Model Rule 1.8(f) (compensation from one other than the client)
• Washington RPC 1.7; RPC 1.8(f)

See also

• WA Ethics Op. 1281: Disclosing Client Confidences to a Nonlawyer Supervisor

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=359

Original opinion text

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

[The lawyer proposed a target budget system for insurance defense claims, where the law firm would receive a bonus for cases coming in under budget, but would not forfeit fees for cases over budget. The system would not apply to certain cases, including if there was a reservation of rights by the insurance company or a claim exceeding policy limits.] The Committee reviewed your inquiry concerning your proposed system for handling insurance defense cases, involving a target budget for each claim. Based upon the facts as submitted in your proposal, the Committee was of the opinion that, as set out, the proposal raises no violations of the Rules of Professional Conduct, so long as you comply with RPC 1.8(f), regarding compensation from third parties.