July 17, 2013: The Medicare Secondary Payer Act (“MSPA”) requires attorneys to notify Medicare of any settlements of personal injury claims where the plaintiff is or will be a Medicare beneficiary, and ensure that Medicare is reimbursed for any benefits it has paid or will pay in the future from the settlement proceeds. In addition, MSPA empowers Medicare to seek reimbursement from parties, insurers and their attorneys of any amounts owed to Medicare where a settlement is entered into and Medicare is not properly notified or reimbursed from the settlement proceeds.

Given this potential exposure created by MSPA, defense counsel has been concerned about protecting their clients and themselves from the potential wrath of Medicare in settlements of personal injury claims. Adding to these concerns is that defense counsel is often forced to rely on information provided by the plaintiff’s counsel concerning whether the plaintiff has received Medicare benefits. As a result, it has become commonplace for defense counsel to include indemnification and hold harmless provisions in settlement agreements and releases, which require the settling plaintiff to defend and indemnify defense counsel, their client and any insurers involved in the settlement from any claims which are subsequently made by Medicare.

But, what happens when the settling plaintiff has little to no funds/resources and a personal defense and indemnification agreement by the plaintiff, therefore, offers little, if any, security or protection against the potential wrath of Medicare?

While in smaller settlements this concern may not be as significant (given that Medicare can only recover the total value of the settlement proceeds), in large settlements the failure to satisfy the Medicare reporting and reimbursement requirements could prove costly if Medicare subsequently seeks its share and the plaintiff has spent the proceeds. As a result, defense counsel seeking to increase the protection offered by the indemnification and hold harmless provisions may be tempted to request that plaintiff’s counsel or law firm also agree to the indemnification and hold harmless provisions. The rationale for this, of course, is to increase plaintiff’s counsel’s incentive to ensure that Medicare is properly reimbursed in the first place, while also increasing the likelihood that there will be someone with the resources to defend and indemnify defense counsel, their clients and their insurers in the event that Medicare seeks reimbursement.

Seems like a win-win idea, right?

Wrong. At least 12 jurisdictions have now addressed the issue of indemnification provisions in settlement agreements/releases which obligate the settling plaintiff’s counsel. The clear message is that it is an ethical violation for plaintiff’s counsel to agree to indemnify defense counsel, their clients and their insurers. According to the advisory opinions, such an agreement by plaintiff’s counsel creates a potential conflict of interest with a current client, thereby violating the ethical rules. Thus, a plaintiff’s attorney may not enter into such an agreement.

Ok, so it could be a problem for the plaintiff’s counsel, but it can’t hurt to ask, right?

Wrong. Although not all jurisdictions have gone this far in the analysis, those that have addressed the issue have found that the ethical rules generally prohibit one attorney from inducing another attorney to violate the ethical rules. As such, if defense counsel asks plaintiff’s counsel to enter into such an agreement and thereby violate the rules, defense counsel also may be guilty of an ethical violation. Thus, defense counsel also may not request that plaintiff’s counsel enter into such an agreement.

In the end, this outcome is clearly not the best for defense counsel, their clients and their insurers (such as Insurance Quotes, as an example) who wish to have some comfort that they are protected from Medicare down the road. Defense counsel, however, must beware of this ethical trap and check with their home jurisdictions to ensure compliance with their ethical obligations.

For more information, contact Christopher Renzulli or Ed Brondo.