1999-04

Impermissible conflict exists where law firm sells pre-paid legal insurance policies and also provides insureds with legal services required under the policies.

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Impermissible conflict exists where law firm sells pre-paid legal insurance policies and also provides insureds with legal services required under the policies.

QUESTION:

Your law firm proposes to offer pre-paid legal
services directly to clients without involving an insurer.
Your firm would, in effect, perform the function of an
insurer and sell pre-paid legal services policies to
individuals or businesses. When the insured has need of
legal services, and, in effect, makes a claim against the
policy, your firm would then undertake to provide those
services at no additional cost to the insured. The insured
then also becomes your client. One of the examples
provided
in your letter is as follows:

“ABC County has 136 property management
companies. If a legal service plan was devised
and 76 property management companies paid $125.00
each per month to an attorney or firm that would
gross $9,500.00 per month and $114,000.00 per
year to provide unlimited Sanderson Act evictions
in District Court and unlimited motions for
‘Relief from the Automatic Stay’ in Bankruptcy
Court.”

You attached with your request a letter from the
Alabama Department of Insurance which states that your
proposal is not insurance and therefore not subject to
their jurisdiction.

ANSWER:

While your proposal may or may not be the type of
insurance which is subject to regulation by the Insurance
Department, there is no question that what you propose is
to insure individuals and businesses against the cost of
obtaining legal services. After extended deliberation, the
Disciplinary Commission is of the opinion that there is an
inherent conflict of interest in a law firm selling pre-
paid
legal insurance and then providing the insured with the
legal services required under the policy.

DISCUSSION:

The Disciplinary Commission’s opinion that your
proposal creates a conflict of interest between the
attorney
and the client is based, in part, on the concern that the
proposed arrangement would eliminate the financial
incentive
the lawyer normally has to provide the client with the best
possible representation the lawyer is capable of providing.
Under the traditional pre-paid legal services plans offered
by the insurance industry, the insured pays a monthly
insurance premium to the insurer. When the insured needs
legal services, the insured makes a claim under the policy
and is referred by the insurer to an approved participating
attorney who is paid by the insurer for the services
actually rendered. Attorneys who participate in pre-paid
legal services plans agree to provide specified legal
services to the insured for a set fee, e.g., preparation of
a simple will for $150.00. If the insured needs more than
one legal service, the attorney is compensated for each
legal service he provides, although obviously he may charge
only the fee amount provided in the policy. If the insured
wants more or different legal services than those covered
by
his policy, he must pay the attorney an additional fee,
over
and above the policy premium he has paid to the insurer.
In other words, under traditional legal service policies,
the attorney is entitled to be paid by the insurer for each
legal service provided pursuant to the policy, and is
entitled to be paid by the insured/client for any legal
services provided which are not covered by the policy.

In contrast, your proposal requires the attorney to
provide an unlimited number of legal services to the
insured/client for one set monthly fee. This arrangement
creates a conflict of interest between the attorney and the
client, in that, once the fee or insurance premium is paid,
it is to the lawyer’s advantage not to have to provide
legal
services to the client. Any legal problem the client has
is going to cost the attorney time and effort for which he
will receive no additional compensation.

Normally, it is to the lawyer’s advantage to provide
the client with all the legal services the client could
possibly need, because the more services the attorney
provides, the more he gets paid. Your proposal would
result in an attorney-client relationship which is just
the opposite. The attorney has already been paid all he is
going to be paid for whatever services the insured/client
needs. The attorney has already been paid all he is going
to be paid regardless of how extensive or how complex the
insured’s/client’s legal needs may be. As a result,
instead
of having an incentive to provide the client with all of
the legal assistance the client needs, the attorney is
placed in the position where it is to his advantage to
provide the client with as little legal assistance as
possible.

The Disciplinary Commission’s opinion that your
proposal creates a conflict of interest between the
attorney
and the client is also based on the fact that there is an
inherent conflict of interest between the insurer and the
insured. Pursuant to your proposal, wherein the insurer
and the attorney are one and the same, this inherent
conflict between the insurer and insured would permeate
the attorney-client relationship.

The policyholders to whom an insurer sells insurance
make up a “pool” of insureds. When an insurer issues a
policy of insurance the insurer is, in reality, betting or
taking the chance that most of the insureds in the “pool”
will not need the benefits the insurer has agreed to
provide
if needed. In pre-paid legal services plans, the insurer
is
betting that most of the insureds will not need the
services
of a lawyer. If so few of the insureds in the “pool” need
legal services that the insurer collects more in premiums
than it pays out in attorney fees, the insurer wins the
bet.
But if there are so many insureds who need services that
the insurer pays out more in attorney fees than it collects
in premiums, the insurer loses and must either raise its
premiums or go out of business. But in either event, the
participating lawyer to whom the insurer referred the
insured is paid for each legal service he provides as long
as the policy remains in effect.

However, when the lawyer assumes the role of the
insurer, he is both collecting the premium and providing
the service for which the premium is collected. When the
insured makes a claim on his policy, the lawyer’s insured
also becomes the lawyer’s client. Like the insurance
company, the lawyer is betting that most of the insureds/
clients in the “pool” will not need his services or will
need only minimal services. If the most of
insureds/clients
do not need legal services or need only services which cost
the attorney in time and effort the equivalent of the
premium he has collected, then the lawyer wins. But if a
large number of the insureds/clients in the “pool” need
services which cost the attorney time and effort in excess
of the amount of the premium he has collected, the lawyer
loses. If the services needed by the insureds/clients
cost substantially more than the premium amount, the lawyer
loses substantially. And, if a large number of the
insureds/clients in the “pool” need services which cost
the attorney time and effort substantially in excess of
the amount of the premium, the lawyer is facing financial
disaster. Under these circumstances the attorney will
naturally look for ways to cut his cost, either by
providing
fewer or lower quality legal services than he would if he
were being paid full value for those services, or by taking
the position that the services the client needs are not
covered under the insurance policy. It conclusively
appears
that your proposal would create a situation where the
interest of the attorney and the interest of the client are
clearly and directly adverse.

Mention should also be made in connection with your
proposal of the recent formal opinion of the Disciplinary
Commission of the Alabama State Bar, RO-98-02. In that
opinion, the Commission held that it is ethically
impermissible for an attorney to allow the insurer to
impose restrictions or limitations on the attorneys
representation of the insured. The Commission concluded
that such restrictions constitute an interference with the
lawyer’s independence of professional judgment in violation
of Rules 1.8(f) and 5.4(c) of Rules of Professional Conduct
of the Alabama State Bar. The concerns expressed in that
opinion, and the prohibitions imposed by the Commission in
response thereto, are equally, if not more compellingly,
applicable where the insurer and the attorney are one and
the same.

Finally, a related problem in regard to your proposal
has to do with the ethical concerns involved when an
attorney uses a second profession as a “feeder” for the
attorney’s law practice. The Disciplinary Commission has
consistently held that an attorney who has a second
profession or business may engage in both simultaneously.
See, e.g., RO-87-158 (attorney and credit bureau owner);
RO-87-80 (attorney and engineer); and, RO-87-161 (attorney
and real estate broker), copies attached. For example, an
attorney who is also a professional engineer may be
a member of an engineering firm and, at the same time, a
member of a law firm. If the attorney has a client who is
in need of engineering services, the attorney may refer his
client to his own engineering firm, as long as full
disclosure is made of the attorney’s interests in the
engineering firm. The converse, however, is not true.
If the engineering firm has a client who needs legal
services, the engineering firm may not refer clients to
the law firm. To do so would circumvent the rules against
direct in-person solicitation, because, unlike lawyers,
professional engineers are not prohibited from directly
soliciting customers or clients.

In RO-85-46 and again in RO 86-11, the Disciplinary
Commission addressed the ethical implications of an
attorney
who is also a salesperson for a prepaid legal services plan
and held that such dual employment was ethically
permissible
subject to specific conditions. In RO 85-46, the
Commission
held, in pertinent part, as follows:

“There would be nothing unethical, per se, in
an Alabama attorney acting as an agent for a
prepaid legal services company in which such
attorney is active in the sale of prepaid
legal services policies to persons who may
need the future use of any attorney for which
the policy would cover the expenses of the
future use of an attorney if (1) the attorney
does not indicate on his letterhead, office
sign, or professional card that he is agent
for the legal services company,(2) does not
identify himself as an attorney on any
publication in connection with his occupation
as agent for the prepaid legal services
company and (3) does not use his other
business or occupation as agent for the
legal services company as a cloak for
solicitation of legal work or as a feeder
to his law practice.

* * *

The Office of General Counsel and the
Disciplinary Commission have on a number
of occasions held that there is nothing
unethical, per se, in an attorney engaging
in another business or profession. We are
of the opinion, however, that your business
as an agent for a prepaid legal services
company should be conducted both physically
and functionally separate from the operation
of your law practice.

We are of the further opinion that the only
way in which you could effectively avoid
violating Disciplinary Rule 2-103(A)(4)
would be to refuse proffered employment
from any prospective client who obviously
came to you only as a result of the fact
that you had previously acted as an agent
in selling to him prepaid legal service
policies. This is not to say that certain
regular clients would not employ you under
the circumstances even though you had sold
to them prepaid legal service policies.
You would be required to exercise your own
good judgment in this regard.”

The above cited opinions clearly indicate that your
proposal would violate the prohibition against using a
second business or profession as a “feeder” for your
practice, would violate the admonition that any activity
you may engage in as salesperson for prepaid legal services
be conducted both physically and functionally separate from
the operation of your law practice, and most significantly,
would violate the prohibition against representing anyone
to whom you had sold prepaid legal services insurance.

In summation, it is the opinion of the Disciplinary
Commission of the Alabama State Bar that your proposal to
provide pre-paid legal services insurance coverage to your
own clients would result in an impermissible conflict of
interest between your firm and the client, would be
contrary
to the prior opinions of the Disciplinary Commission and
is therefore ethically unacceptable.

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