Opinion 2213

This opinion concerns a lawyer’s duties when a third-party insurer makes a claim to funds in the lawyer’s possession, but the lawyer’s client has instructed the lawyer to disburse those funds solely to the client. On the facts presented, it is the lawyer’s duty to hold the funds in trust or to interplead them until the underlying dispute between the client and the client’s insurer is resolved.

Lawyer represents Client on a contingent fee basis for injuries and damages Client suffered in an automobile accident. Client has an automobile insurance policy with Insurer that includes personal injury protection (“PIP”) benefits. Pursuant to the policy’s PIP provision, Insurer paid $10,000 of Client’s medical bills stemming from the accident. The policy contains a clause providing that Insurer “shall be reimbursed to the extent of [Insurer’s] payment after [Client] has been fully compensated for his or her loss.” The policy is a contract between the Client and Insurer; Lawyer is not a party to the policy, nor has Lawyer promised to pay Insurer or otherwise to protect Insurer’s interests, pursuant to the policy.

Lawyer, with Client’s approval, negotiates a settlement of Client’s personal injury claim against the responsible third party. Lawyer requested and received from Insurer a copy of Insurer’s PIP ledger, and a letter stating:

"This letter is to advise you of our rights of recovery to the extent of our payment minus an appropriate share of attorney fees where required by state law. Please contact me prior to settling the case to confirm the amount due back to us. Attached is a medical ledger of payments tendered on behalf of your client. . . . Our insured’s policy states, in part, if we make a payment under this policy and the person to or for whom payment is made recovers damages from another, that person shall: 1) Hold in trust for us the proceeds of recovery; and 2) reimburse us to the extent of our payment. . . . We respectfully request you to protect our subrogation interest. I would appreciate receiving your response within the next 30 days."

After Lawyer receives the settlement proceeds, Client specifically instructs Lawyer not to repay Insurer for any PIP benefits paid on Client’s behalf. Lawyer has requested an advisory opinion on his ethical obligations in these circumstances.

RPC 1.15A(f) provides that, “[e]xcept as stated in this Rule, a lawyer must promptly pay or deliver to the client or third person the property which the client or third person is entitled to receive.” Under RPC 1.15A(g):

If a lawyer possesses property in which two or more persons (one of which may be the lawyer) claim interests, the lawyer must maintain the property in trust until the dispute is resolved. The lawyer must promptly distribute all undisputed portions of the property. The lawyer must take reasonable action to resolve the dispute, including, when appropriate, interpleading the disputed funds.

To trigger the lawyer’s safekeeping duties under RPC 1.15A(g), a claim by a third party must be specific to the funds in the lawyer’s possession, because the rule only applies to “property in which two or more persons . . . claim interests,” and not to all property of the client. Moreover, it is unreasonable to require a lawyer to protect all claims of all creditors of a client or to pay general unsecured creditors of a client, including general judgment creditors who have not attached or garnished any specific funds. That would unduly compromise the lawyer’s duties to the client, and would unreasonably burden the lawyer’s ability to use a trust account to facilitate the client’s provision and receipt of funds in connection with matters on which an attorney is providing representation.

The third-party claim also must have a valid legal basis and be non-frivolous. This does not require the lawyer to be the ultimate arbiter of the dispute. Rather, it requires the claimant to establish a reasonable prima facie legal right to the property in the lawyer’s possession before the ethical duties under RPC 1.15A will apply. Such a right could be established, for instance, by an existing ownership interest, a statutorily created lien, or a claim based on a contract entered into by the client and the claimant. To the extent the conclusion of this paragraph varies with the conclusion reached in Advisory Opinion no. 2166, that portion of the prior opinion is superseded.

An insurer’s claim to settlement proceeds, if based on a contractual right to recover prior payments from such proceeds, is a “claim” that subjects the lawyer to the duties under RPC 1.15A(g). That claim is specific to the funds (property) in the lawyer’s possession, is agreed to between the client and insurer under the terms of their insurance contract, and is a non-frivolous assertion of that contractual right. Under the facts presented, the insurer’s citation of its contractual right to the funds, plus the insurer’s request for the lawyer to “protect our subrogation interest,” is the assertion of a claimed interest in the property sufficient to trigger the lawyer’s duties under RPC 1.15A(g).

The lawyer’s exact resolution of the dispute between client and insurer is beyond the scope of this opinion, and will be fact-specific. Under RPC 1.15A(g), the lawyer is required to “promptly distribute all undisputed portions of the property.” After that, pursuant to the rule’s Comment [9], “the extent of the efforts that a lawyer is obligated to take to resolve a dispute depend on the amount in dispute, the availability of methods for alternative dispute resolution, and the likelihood of informal resolution.”

Although also beyond the scope of this opinion, it is notable that the lawyer’s ethical duties in these circumstances neither create nor eliminate potential civil liability to the third-party claimant. Under Comment [4] to the rule, “[t]he inclusion of ethical obligations to third persons in the handling of trust funds and property is not intended to expand or otherwise affect existing law regarding a Washington lawyer’s liability to third parties other than clients.” (citing Trask v. Butler, 123 Wn.2d 835, 872 P.2d 1080 (1994); Hetzel v. Parks, 93 Wn.App. 929, 971 P.2d 115 (1999))

[Amended 2012]