DANGER: Ethics Violations in Settlement Agreements

DANGER: Ethics Violations in Settlement Agreements

Plaintiff’s Counsel Violates RPC by Agreeing to Indemnify Defendants for Liens

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Very strong indemnity/hold harmless language regarding liens—especially with respect to Medicaid and Medicare—is now standard in most settlement agreements. As plaintiff’s attorneys, we often see language that obligates not just the plaintiff, but also plaintiff’s counsel, to indemnify the defendants and their insurance carriers against lien and reimbursement claims by health plans.

With defendants and liability carriers being directly exposed to Medicare and Medicaid lien enforcement, they want the maximum possible security against being held responsible for liens. Defendants and carriers may seek to include plaintiff’s attorney as an indemnitor in the settlement agreement because plaintiff’s counsel is generally a more secure source of indemnity than an individual plaintiff.

Plaintiff’s counsel may feel pressure to agree to indemnification because all parties share a joint interest in finalizing a settlement and closing the related liability claim.

Since this issue usually arises after the basic terms of settlement have been agreed to—and when the plaintiff has developed an expectation of imminent payment—it can be difficult to explain that ethical rules prohibit plaintiff’s counsel from being a party to an indemnity clause. The likely response from the client may be to simply demand that the lawyer sign, rather than risk blowing up the settlement.

What’s a lawyer to do?

According to the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee, as stated in Opinion No. 532 [here]:

“Plaintiff’s counsel in a personal injury action may not enter into an agreement to defend and indemnify defendants, defense counsel or their liability insurers against an action brought against them by third parties, such as Medicare or health insurers, to recover a debt plaintiff might owe the third parties.”

To do so would violate multiple Rules of the Rules of Professional Conduct, including the rule against creating a direct conflict of interest between attorney and client. The opinion goes on to conclude that if a client demands the lawyer agree to such terms, the lawyer should withdraw.

That’s harsh!

However, there’s a silver lining: defense counsel may be violating the rules of ethics simply by making the demand. The Committee stated:

“Defendant’s counsel’s demand that plaintiff’s counsel agrees to indemnify defendants and their agents would violate Rule 8.4(a), which prohibits a lawyer from soliciting or inducing a violation of the Rules of Professional Conduct or the State Bar Act.”

Thus, we have a mechanism to cut this issue off at the start.

Contrast: Monster Energy Co. v. Schechter

Compare Opinion No. 532 to the California Supreme Court’s decision in Monster Energy Co. v. Schechter, 7 Cal. 5th 781 (2019), where the Court found that whether plaintiff’s counsel was personally bound by a confidentiality provision in a settlement agreement was a question of fact—even though counsel signed only as “Approved as to Form and Content.”

The Monster Energy opinion does not address or cite the Rules of Professional Conduct, even though similar conflict-of-interest concerns arguably apply. This may be due to the procedural posture (an anti-SLAPP motion), and the gravamen of the case being counsel’s personal conduct in allegedly violating a confidentiality clause—not indemnifying third parties.

Practical Practice Tips:

1. If proposed settlement documents include language seeking to bind plaintiff’s counsel to indemnity/hold harmless provisions, push back—hard.
2. A letter including Opinion No. 532 should be sufficient to have the language removed.
3. Consider reasonable alternatives to give the defense assurance regarding unresolved liens:
4. Have the liability carrier hold the lien amount and tender the balance of the settlement fund.
   1. Note: Carriers generally dislike this approach because it keeps the claim file open.
5. Ask the carrier to issue two checks—one for the lien amount payable jointly to the lienholder and plaintiff’s counsel’s trust account, and one for the remaining balance payable to the plaintiff and their counsel.
   1. This approach is increasingly standard. If the lien isn’t resolved, the first check is returned and reissued as needed.
6. Agree to place the lien amount in escrow until resolution.
   1. This has become a more popular option because it allows the liability file to close while the lien issues are resolved independently.
7. Get ahead of the lien/reimbursement issues early.
8. The best approach is to start on lien resolution well before settlement discussions begin. Having lien processing and reduction underway helps leverage better outcomes and avoids settlement hang-ups.

In many cases—especially involving ERISA, FEHBA, and MAO liens—resolving the lien before settling the case is vital.

Bottom Line:

The inclusion of plaintiff’s counsel in indemnity provisions may seem like a practical concession to get a case settled, but it’s an ethical minefield. Opinion No. 532 makes it clear that attorneys cannot ethically agree to such terms, and in fact, should withdraw if pressed to do so.

Equally important, defense counsel may be violating their own ethical obligations by requesting or insisting upon such provisions.

Don’t let the pressure of closing a settlement jeopardize your license.

Explore More Resources with Lien Project Network

For a deeper dive into lien resolution strategies, settlement planning, and reimbursement challenges, explore our educational modules. Lien Project Network serves as a trusted resource for plaintiff attorneys, providing insights on financial planning, public benefits, and structured settlements in the context of lien management.

Need Assistance? Work With The Lien Project, PC

If you need expert legal assistance in navigating lien resolution, reimbursement claims, or settlement planning, our team at The Lien Project, PC is ready to help. As an LPN member, you earn credits that can be applied toward lien reduction and resolution services provided by The Lien Project, PC, allowing you to offset up to $900 per year. Your investment in continuing education through Lien Project Network not only enhances your lien resolution skills but also reduces the cost of engaging legal experts when needed.

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