In your letter of June 9, 1988 to the Philadelphia Bar Association Professional Guidance Committee, you asked for an opinion regarding the ethical issues posed as the result of the settlement of a dispute over an unpaid balance of a hospital bill. As you related in your inquiry, the daughter of a couple now engaged in the process of a divorce, incurred substantial medical expenses during a 1982-83 hospitalization. A dispute arose when the insurance carrier of a policy purchased by husband for the sole benefit of the daughter refused to pay a portion of the bill for which the hospital sought payment from wife, husband and daughter.
In April 1987, the hospital filed suit against the husband, wife and daughter for the unpaid medical bills of $20,000. In February of 1988, the counsel for the husband/ daughter filed a summons joining the insurance carrier as an additional defendant. The insurance company then reviewed the claim, realized it was obligated to pay the claim and settled with the husband/daughter for 95% of the claim. Counsel for the husband/daughter did not inform counsel for the hospital or the wife of the payment.
The husband/daughter settled with the hospital for $5,000, without disclosing the receipt of the insurance proceeds. The wife also settled for $5,000. Husband refused to disclose to wife where his settlement proceeds were obtained. Counsel for husband/daughter is presently holding the balance of the insurance proceeds.
The central question is who is entitled to the excess money obtained in settlement with the insurance carrier. To properly evaluate that issue under the Rules of Professional Conduct, the Committee recommends that you analyze the facts of your case with regard to the following issues. 1
First, is the insurance policy one of indemnity or is it a policy by which payment is made according to a schedule based upon the services provided? Where the contract is one which indemnifies, any excess over the debt must be returned to the insurance carrier. In such a case, if the husband or daughter retained the excess payment a fraudulent act would occur which the lawyer has been a party or participant. The lawyer, obviously, can not permit that to occur. See Rule 1.2(d). If, however, the benefits are paid according to a schedule dictated by the type of services rendered, there may not be an obligation to reimburse the carrier for overpayment. In that event, the daughter, as the insured, may direct the payment to be made to either, both or neither of her parents after the hospital's debt is satisfied.
An additional issue is whether there has been an assignment of benefits made to the hospital by husband at the time of the daughter's admission. If such a document exists, it would render the attorney's conduct fraudulent if he negotiated with the hospital knowing that 90-95% of the hospital debt was being paid by insurance which had been previously assigned to the hospital for payment of its bills.
You must determine the existence and language of the two documents described above in order to determine how properly to distribute the monies which you hold in escrow. Once you have analyzed the pertinent documents, you must review the representations you made to the hospital and insurance carrier regarding the use of the insurance proceeds. In doing so, you must be sensitive to the mandates of Rule 4.1, which you refer to in your letter.
Rule 4.1 makes clear that an attorney cannot knowingly omit material information from disclosure to aid or abet fraudulent conduct by his client. Specifically, the Rule provides:
Rule 4.1 Truthfulness in Statements to Others
In the course of representing a client, a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third person; or
(b) fail to disclose a material fact with third person when disclosure is necessary to avoid aiding and abetting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6 [Addressing confidentiality of information]. 2
The Rule, which dictates that there be candor in dealings with third persons, requires the lawyer to be truthful when dealing on the client's behalf, but generally imposes no affirmative duty to inform an imposing party of relevant facts. However, misrepresentations can occur if the lawyer affirms or incorporates the statement of another person which the lawyer knows is false or by the lawyer's failure to act. Moreover, the Rule refers to statements of fact and whether or not a statement should be regarded as one of fact depends on the circumstances. See comments accompanying Rule 4.1. See also Nebraska State Bar Association v. Addison, No. 87-201, (Nebraska Supreme Court, September 25, 1987). [Nebraska lawyer who failed to disclose existence of opposing party's umbrella insurance policy while negotiating with hospital over bill owed by personal injury client, and who failed to correct hospital employee's misimpression that such policy did not exist, is suspended from practice of law for six months.]
While the Committee did not feel that an informal inquiry by wife's attorney necessarily required disclosure of the source of the funds, it seemed readily apparent that the dispute between the parents, coupled with the husband's support arrearages, are matters better addressed in a domestic relations forum.
In conclusion, you need to address the issues which we have raised in this letter. Once you have done so you should be in position to determine the future disposition of the funds in escrow.
1. The legal issues which are raised in this opinion are beyond the scope of the Committee to address. They are raised only to focus your attention on the ethical issues.
2. Rule 1.6 prohibits a lawyer from disclosing "information relating to the representation," unless certain conditions are met. One of those conditions which permits disclosure is when the services of an attorney have been used in the commission of a fraud. Rule l.6(c)(2).