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How to Avoid Problems with Third Party Payors

3 min read

How to Avoid Problems with Third Party Payors

A lawyer called me wanting to discuss third-party payors because his representation of his client had just ended, and he didn’t know what to do with the excess funds that remained in trust.  In light of that call, I thought it worthwhile to cover the basics because if one lawyer has taken the time to ask, that implies others have questions as well.

Prospective clients in urgent need of legal services don’t always have the financial wherewithal to hire a lawyer.  When this happens, sometimes an employer, family member, relative, friend, or business partner may step up and offer to take care of the legal fees so the prospective client can obtain the help they need.  Should you ever find yourself in a situation like this, a quick review of your jurisdiction’s version of ABA Model Rule 1.8 Conflict of Interest: Current Clients: Specific Rules would be worthwhile.

The relevant section of ABA MRPC 1.8 is 1.8(f) which reads:

A lawyer shall not accept compensation for representing a client from one other than the client unless:

             (1) the client gives informed consent;

             (2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

             (3) information relating to representation of a client is protected as required by Rule 1.6.

Thus, a lawyer may accept fees from a third party as long as the client consents to the arrangement, the lawyer is committed to protecting the client’s confidences throughout the course of representation, and the lawyer makes it clear that the third-party payor (hereafter referred to as payor) is not the client and will have no right to instruct the lawyer or be involved in any decisions regarding the client’s matter.  If there is going to be a problem at some point down the road, it’s often a result of not taking the guidance of Rule 1.8(f) to heart.

At the outset, you must do your best to try and determine whether there is a significant risk that your representation will be materially limited by the expectations of the payor.  For example, a payor may want to try to minimize the amount he or she will ultimately be responsible for covering by intending to have some say in the decision-making process, or at the very least be kept up to date on the status of the matter as it progresses.  This is why an initial discussion with the payor that explains the duty of confidentiality, the necessity of preserving attorney-client privilege, the fact that paying the prospective client’s bills does not make the payor a client, and seeks to determine exactly what the payor is willing to pay for must occur.  Depending upon how that discussion goes, it may or may not be appropriate to even ask the prospective client to consent to your receiving compensation from the payor.  After all, if it seems clear the payor intends to place unreasonable limits on your scope of representation or may try to interfere with your ability to represent the client in a manner inconsistent with your best judgment and inconsistent with the client’s goals and objectives going forward, it would be unethical to agree to accept compensation from the payor.

Assuming the expectations of the payor are reasonable, you will need to have the prospective client consent to the arrangement, preferably in writing.  Discuss attorney-client privilege with the prospective client and explain how it can be lost.  If the payor has placed reasonable limitations on your scope of representation in terms of what he or she is willing to pay for, explain what those limitations are, let the prospective client know what the legal ramification of that reality is and discuss any options the prospective client might have.  Finally, let the prospective client know what will happen should the payor stop paying at some point, to include whether the prospective client will be responsible for any unpaid bills.

If the prospective client consents to the arrangement, have the payor and client each sign a separate engagement agreement.  Make sure to include in each agreement clarification as to what the payor is agreeing to be responsible for; that absent client permission you will not disclose confidential information to the payor; and, absent an agreement to the contrary, any leftover funds at the conclusion of representation will be returned to the payor.  Explain that the billing statement each receives will have differing levels of detail, meaning the client will receive a detailed invoice and the payor will receive a more general progress-oriented statement.  Establish two avenues of communication, one for the payor and another for the client, and finally, follow through on maintaining the boundaries you have just established throughout the course of representation.

We all know that getting paid is but one challenge among many in the practice of law.  While a third-party payor can be a viable source of payment, should you ever decide to go down this path you really do need to abide by the guidance set forth in Rule 1.8(f) and you should always clearly and thoroughly document the terms of the fee arrangement with both the client and payor.  To do anything less would just be asking for trouble.

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Since 1998, Mark Bassingthwaighte, Esq. has been a Risk Manager with ALPS, an attorney’s professional liability insurance carrier. In his tenure with the company, Mr. Bassingthwaighte has conducted over 1200 law firm risk management assessment visits, presented over 600 continuing legal education seminars throughout the United States, and written extensively on risk management, ethics, and technology. Mr. Bassingthwaighte is a member of the State Bar of Montana as well as the American Bar Association where he currently sits on the ABA Center for Professional Responsibility’s Conference Planning Committee. He received his J.D. from Drake University Law School.

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