November 21, 2006
A lawyer may accept a fee for referring a client to an insurance company, provided the client consents in writing following the lawyer's full disclosure of the lawyer's interest to the client and the client is advised that the client may seek services from other insurers and should obtain independent counsel before deciding to seek services from that insurer.
References: MRPC 1.7(b), 1.8(a); R1-135, RI-146, RI-190 and RI-317.
PLEASE NOTE THAT THIS OPINION SUPERSEDES ETHICS OPINION RI-146.
A lawyer in private practice has been asked by an insurance company to join a referral program, through which the lawyer would receive a commission on any insurance contracts written for customers referred by the lawyer. The lawyer asks whether this arrangement would be ethically permissible.
As a threshold matter, we note that we were not asked whether a referral program like the one raised by the inquirer would comply with Michigan insurance law and regulations. That is a question which is beyond the Committee's authority, and we confine our discussion here to the ethical implications of such a program.
In RI-146, the Committee opined that a lawyer may not accept a percentage of a broker's commission as a referral fee because it would be a conflict of interest under MRPC 1.7(b), which states: "a lawyer shall not represent a client if the representation of that client may be materially limited . . . by the lawyer's own interests unless the lawyer reasonably believes that representation will not be adversely affected and the client consents after consultation."
The Committee concluded, without analysis, that a lawyer "could not reasonably believe the representation will not be adversely affected" by the referral arrangement, and suggested that by entering into such an arrangement, the lawyer would be abusing his or her position of trust for the lawyer's own benefit. The Committee noted that the comment to MRPC 1.7(b) states that a "lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed interest."
More recently, the Committee was asked in RI-317 whether lawyers may accept a referral fee from an investment advisory firm upon referring a client to the firm for investment services. The Committee disagreed with the conclusory opinion in RI-146, observing that clients often look to lawyers for recommendations, and when making recommendations or referrals, lawyers are motivated by many things, only one of which may be money. For example, the Committee observed that "the beneficiary of the referral may be a friend or relative of the lawyer or may refer clients to the lawyer." With most referrals the lawyer has some interest in making the referral, including, of course, an interest in having the client ultimately happy with the referral. The Committee therefore concluded there should not be a per se rule against referrals where there is some benefit to the lawyer—even a financial benefit—arising from the referral.
Instead, the Committee opined that a referral fee is permitted if the lawyer complies with MRPC 1.8(a):
A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents thereto.
Accordingly, the Committee opined:
Provided written disclosure is made to the client regarding the nature and extent of the relationship with the advisory firm, including the referral fee, and the client is advised of the right to seek services from other investment advisors and to obtain independent counsel before deciding whether to choose this advisor, the client may make an informed decision and consent to the referral fee. Because of the lawyer's ongoing financial interest in the fees paid to the advisory firm and that the lawyer is an agent of the advisory firm, full written disclosure should include (among other things) that the lawyer cannot render legal advice to the client if disputes or differences arise between the advisory firm and the client.
We also note that the Committee has previously opined that a lawyer may directly sell insurance products to a law client, provided that the lawyer complies with MRPC 1.8(a), and that a lawyer may also refer clients to a financial planning business in which the lawyer is the sole shareholder, provided the disclosures and advice of MRPC 1.8(a) are provided to the client. See RI-135 ("lawyer/insurance agent may sell insurance to law clients provided that the ethics rules regarding business transactions with clients [MRPC 1.8(a)], confidentiality [MRPC 1.6(b)] and conflicts of interest [MRPC 1.7 and 1.9] are observed."); RI-190.
There is no substantive difference between (a) receiving a fee for referring a client to an investment advisory firm, RI-317 and (b) receiving a fee for referring a client to an insurance company. In each situation the transaction may be viewed as a business transaction between the lawyer and the client, because the lawyer is an agent of the advisory firm or, in this request, the insurance company. Moreover, if a lawyer may ethically receive a financial benefit from selling insurance products directly to a law client (RI-135), the lawyer should also be permitted to obtain a financial benefit from referring a client to an insurance company for such products, provided that the lawyer provides the full written disclosures and advice to the client required by MRPC 1.8(a), including a disclosure that the lawyer cannot render advice to the client if disputes or differences arise between the insurer and the client.