With hurricane season upon us again, many lawyers may soon find themselves representing homeowners in property damage claims against insurance companies. If the property is subject to a mortgage, often the mortgage will contain covenants purporting to create claims against the casualty insurance proceeds, and these lawyers will find themselves dealing with a third-party lienholder such as a mortgage servicing company. In the event a recovery is obtained for the client, lawyers can encounter unexpected ethical pitfalls in dealing with the third-party lienholders.

Lawyers usually take property damage matters on contingent and statutory fee agreements. On settlement, an insurer who is aware of a third-party lienholder will sometimes issue one check in the names of all the interested parties — the insured, the insured’s lawyer, and the lienholder — and let the parties sort out their interests among themselves. In attempting to negotiate the check, what happens when the lienholder tries to put demands on the lawyer? What if the lienholder refuses to endorse and return the check and instead asks the lawyer to endorse the check over to the lienholder and seek attorneys’ fees directly from the homeowner instead of from the recovery? Lawyers have encountered these issues when dealing with mortgage servicing companies that have pointed to provisions in the mortgage that they allege allows them to hold the funds for home repair in escrow.

Complying with the lienholder’s demands raises some ethical concerns. Subsection (f)(5) of Rule 4-1.5, Rules Regulating The Florida Bar, which governs contingent fees, states in relevant part: