80-F-2 - Agents for Title Insurance Companies

FORMAL ETHICS OPINION 80-F-2


Under date of September 5, 1980, the Disciplinary Board received a
request from an attorney in Hamilton County for a formal ethics opinion
pursuant to Rule 42 Section 26(1), regarding attorneys serving as agents
for title insurance companies and potential conflict of interests in this
regard.


This inquiry appears to have been fully covered by the American Bar Association's
Committee on Ethics and Professional Responsibility Formal Opinion 331 dated
December 15, 1972, which by reference is adopted and incorporated herein as the formal
ethics opinion of the Disciplinary Board of the Supreme Court of Tennessee.
Questions have been raised as to ethical problems that may arise out of the
relationship between lawyers and title insurance companies and title
guaranty funds under the Code of Professional Responsibility. The
protection of a client's title has historically been the business of his lawyer
through the issuance of a title opinion. However, title insurance
companies and title guaranty funds (herein together called "title
companies") have, in most states, been created by private industry as well
as by bar associations in a number of states, and title companies frequently
retain attorneys to write title insurance or to act as their agents. In
addition, in many states, lawyers who are engaged by clients to examine
titles are also closely involved in the operation of title insurance
companies and in many instances have financial interests in these title
insurance companies.


Under the Old Canons of Ethics
This Committee has considered this question in a number of opinions
under the old Canons of Ethics. The old Canons of Ethics contained no
prohibition against an attorney acting as agent for a title company or
securing title insurance so long as there was full disclosure to the client
and so long as the attorney complied with the Canons of Ethics,
particularly Canons 27 and 38. (See Informal Opinions 501, 563, 716 and
883.)


The Committee, in Informal Opinion Nos. 726 and 731, stated that it was
appropriate for a bar association to own and conduct a title insurance
business and to write title insurance through attorneys so long as there was no violation of the
Canons of Ethics with reference to advertising and so long as a full
disclosure was made by the attorney of his interests in the title company.
As the Committee stated in Informal Opinion No. 726:


The business of examining records and preparing abstracts of title has
historically been lawyer business. At an early stage in our history, lawyers
waited on the court officers to examine their records in order to pass upon
abstracts. Thereafter, lawyers began to keep their own records for the
purpose of making it easier for them to prepare abstracts and examine
records. About this same time, lay agencies also got into the business of
preparing abstracts and certifying as to their correctness. This historical
background is stated for the purpose of showing that the business of
preparing abstracts is different from the operation of collection agencies or
insurance agencies, which havebeen condemned by Ethics Opinions when
conducted by lawyers in their offices.


In some instances where an attorney makes a title examination and writes
a title insurance policy, there is no true attorney-client relationship with
the insured. One such case is where the attorney is representing the
lending institution and he examines the title for the lending institution and
issues a title insurance policy; he is acting in that case as the attorney for
the lending institution and not for the borrower, even though the borrower
does pay the cost of title examination and title insurance as part of the loan
costs. The fact that the borrower may ultimately pay for the title insurance
by reason of the terms of the loan agreement still does not create the
relationship of attorney and client between the attorney and the borrower.
In that instance, if the attorney makes full disclosure to the lending
institution of his interests, if any, in the title insurance company and of the
fact that he may receive some financial compensation from it, and if the
institution consents, there is nothing unethical in the attorney's conduct.
(See Informal Opinion No. 563.)


Where the attorney represents both the buyer and seller or the lender and
borrower, he should make full disclosure of the fact that he will receive a
commission or dividend from the title company and obtain his client's
consent to such arrangement. (See Informal Opinion No. 883.)
In Informal Opinion 1038, this Committee found no violation of ethics
where attorneys and laymen organized and operated a title company so
long as the company did not directly or indirectly advertise the lawyers who were stockholders.


The whole subject was discussed in the Committee's Formal Opinion No.
304, in which the question of possible violation of Canons No. 27 and 38
was discussed and the Committee concluded that there was nothing
unethical in an attorney recommending title insurance or providing title
insurance for clients so long as there was full disclosure to the client and
there was no advertising of the attorney.


In summary, there was nothing in the old Canons of Ethics that prohibited
attorneys from acting as agents for title companies or issuing title
insurance policies and receiving compensation therefor so long as they
made full disclosure and complied with the Canons of Ethics with
reference to advertising.


Under the Code
An examination of the Code of Professional Responsibility reveals that
there is no express disciplinary rule or prohibition against lawyers issuing
title insurance policies, acting as agents for title companies, or receiving
compensation from such title companies. However, Canon 5 ("A Lawyer
should exercise Independent Professional Judgment on Behalf of a
Client") is the Canon in the Code which must be considered, together with
the Ethical Considerations ("EC") and Disciplinary Rules ("DR")
thereunder.


EC 5-19 provides:
A lawyer may represent several clients whose interests are not actually or
potentially differing. Nevertheless, he should explain any circumstances
that might cause a client to question his undivided loyalty. Regardless of
the belief of a lawyer that he may properly represent
multiple clients, he must defer to a client
who holds the contrary belief and withdraw
from representation of that client.


DR 5-101(A) provides:
Except with the consent of his client after full disclosure, a
lawyer shall not accept employment if the exercise of his
professional judgment on behalf of his client will be or
reasonably may be affected by his own financial, business,
property, or personal interests.

DR 5-105(A), (B) and (C) provide:
(A) A lawyer shall decline proffered employment if the
exercise of his independent professional judgment in behalf
of a client will be or is likely to be adversely affected by the
acceptance of the proffered employment, except to the
extent permitted under DR 5-105(C).
(B) A lawyer shall not continue multiple employment if
the exercise of his independent professional judgment in
behalf of a client will be or is likely to be adversely affected
by his representation of another client, except to the extent
permitted under DR 5-105(C).
(C) In the situations covered by DR 5-105(A) and (B), a
lawyer may represent multiple clients if it is obvious that he
can adequately represent the interest of each and if each
consents to the representation after full disclosure of the
possible effect of such representation on the exercise of his
independent professional judgment on behalf of each.


DR 5-107(A)(1) and (2) provide:
(A) Except with the consent of his client after full
disclosure, a lawyer shall not:
(1) Accept compensation for his legal services
from one other than his client.
(2) Accept from one other than his client
anything of value related to his representation of or
his employment by his client.
It is apparent that if the lawyer is financially interested in a title company
which will supply title insurance to his client, he must obtain consent of
his client after making full disclosure to the client of the circumstances. If,
however, the lawyer is performing legal services for both the title company
and the client, the lawyer may represent both only if, first, it is obvious
that he can adequately represent the interest of each, and, secondly, both
the title company and the client consent to the representation after the
lawyer has fully disclosed the possible effect of such dual representation
on the exercise of his independent professional judgment on behalf of
each. He must not, of course, violate any other Code provision in his
handling of the transaction.


The Committee therefore holds that it is not a violation of the Code of
Professional Responsibility, per se, for an attorney to act as agent for a title
company and to be compensated therefor if such conditions are met.


This 28th day of October , 1980.


ETHICS COMMITTEE:


Joe Cummings
John R. Rucker
F. Evans Harvill


APPROVED AND ADOPTED BY THE BOARD