Bar Issues Opinion That Indemnification As Condition of Settlement Is Unethical

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The Virginia State Bar’s Standing Committee in Legal Ethics recently issued a legal ethics opinion declaring it unethical for plaintiff’s lawyers to agree to indemnify a defendant and/or his insurer for any third party lien claim against settlement proceeds received by the plaintiff. The Standing Committee has opined that it is likewise unethical for the defendant’s lawyer to demand such an indemnification agreement as a condition of settlement.

Legal Ethics Opinion 1858 (LEO 1858), issued July 27, 2011, is of particular interest to all parties, especially with the introduction of the SCHIP Extension Act of 2007, which requires certain entities, including liability carriers, to report certain payments made to plaintiffs to the Center for Medicare and Medicaid Services (CMS). The goal of this legislation is to protect Medicare’s interest as a secondary payer. Because there are penalties for any party who fails to protect Medicare’s interests, plaintiffs and defendants alike are concerned with ensuring that third party liens are satisfied at the time of settlement. However, practically speaking, the attorneys involved do not always know what liens exist, and must rely on the lay parties for that information. It is no surprise, then, that both attorneys and insurers have an interest in protecting themselves from incurring a penalty from CMS to the extent a third party claim exists of which they are unaware.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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