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Healthcare Letters of Protection Present Conflicts of Interest for Personal Injury Attorneys

Written by jeffreyhoward on . Posted in North Carolina Law Blog.

MEMORANDUM OF LAW REGARDING LETTERS OF PROTECTION

I. ISSUE PRESENTED

Whether an attorney licensed in North Carolina may ethically execute a “letter of protection” agreeing to pay a health care provider from settlement proceeds, where doing so creates obligations to a third party that may conflict with the attorney’s duties to the client.

II. SHORT ANSWER

No. The North Carolina Rules of Professional Conduct prohibit a lawyer from undertaking obligations to third parties that materially limit the lawyer’s representation of a client. A letter of protection creates a concurrent conflict of interest under Rule 1.7, risks impermissible financial entanglement under Rule 1.8, and interferes with the lawyer’s duties regarding the safekeeping and distribution of funds under Rule 1.15.

Health care providers are not without remedy. North Carolina law provides a clear statutory mechanism for protection of medical bills through properly asserted liens under N.C. Gen. Stat. §§ 44-49 and 44-50, which attorneys are legally obligated to honor.

III. GOVERNING SOURCES

IV. EXPLANATION

A. Letters of Protection Create a Concurrent Conflict of Interest Under Rule 1.7

Rule 1.7(a)(2) prohibits representation where there is a “significant risk” that the lawyer’s responsibilities to a third person will materially limit the representation of the client.

A letter of protection does precisely that.

By agreeing to pay a medical provider from settlement proceeds, the attorney assumes a direct obligation to a third party. That obligation creates a material limitation because:

  • The client may wish to dispute, reduce, or refuse payment of the provider’s charges;
  • The attorney, having promised payment, is constrained in advising or pursuing those options;
  • The attorney’s independent professional judgment is divided between client and creditor.

This is not a theoretical concern. It strikes at the core of settlement strategy, negotiation of medical bills, and allocation of proceeds.

Even if client consent is attempted under Rule 1.7(b), the lawyer must reasonably believe that competent and diligent representation remains possible. Where the lawyer has pre-committed settlement funds to a third party, that belief is, at minimum, highly questionable.

B. Letters of Protection Risk Violating Rule 1.8 by Creating Improper Financial Obligations

Rule 1.8 strictly limits financial entanglements arising from representation.

While Rule 1.8(e) allows advancement of litigation expenses, it does not authorize a lawyer to guarantee a client’s debts to third parties.

A letter of protection may function as:

  • A guarantee of payment and/or
  • A commitment that exposes the lawyer to personal liability or pressure to pay regardless of the client’s position.

This creates a self-interest conflict, as the lawyer may act to avoid personal exposure rather than to maximize the client’s recovery.

C. Letters of Protection Undermine the Lawyer’s Duties Under Rule 1.15

Rule 1.15-2 requires a lawyer to:

  • Hold funds in trust when there are competing claims, and
  • Distribute funds only to those entitled to receive them.

Critically, when a claim is disputed, the lawyer must retain the disputed portion in trust until resolution.

A letter of protection improperly short-circuits this framework by:

  • Predetermining entitlement before resolution of disputes;
  • Forcing the lawyer to disburse funds even where the client contests the bill;
  • Transforming the lawyer from a neutral fiduciary into an enforcer of a private agreement.

This is incompatible with the lawyer’s fiduciary obligations under Rule 1.15.

D. The Lawyer’s Duty of Loyalty Runs to the Client, Not to Third-Party Creditors

Rule 1.2 requires the lawyer to abide by the client’s decisions regarding the objectives of representation.

A letter of protection shifts practical control toward the medical provider by:

  • Restricting the client’s ability to challenge charges;
  • Limiting settlement flexibility;
  • Subordinating the client’s financial interests to those of a third party.

The Rules do not permit a lawyer to elevate a third-party creditor’s interests above those of the client.

E. North Carolina Law Provides a Clear, Ethical Alternative: Statutory Medical Liens

Health care providers are not left unprotected. North Carolina law provides a specific mechanism:

  • N.C. Gen. Stat. § 44-49 grants medical providers a lien on personal injury recoveries;
  • N.C. Gen. Stat. § 44-50 governs enforcement and distribution.

To assert such a lien, the provider need only:

  1. Provide the medical records and billing, and
  2. Give notice that a lien is being asserted.

Once properly asserted, the attorney is legally obligated to account for that lien in any disbursement of settlement proceeds.

This statutory framework:

  • Protects providers’ interests,
  • Preserves the attorney’s ethical duties, and
  • Avoids creating extra-contractual obligations that generate conflicts of interest.

V. CONCLUSION

A letter of protection places the attorney in an untenable position:

  • It creates a concurrent conflict of interest under Rule 1.7;
  • It risks improper financial obligation under Rule 1.8;
  • It interferes with fiduciary duties under Rule 1.15.

The North Carolina Rules of Professional Conduct do not require, and do not support, such arrangements.

Instead, the law provides a clear and sufficient alternative: health care providers may protect their interests by properly asserting statutory liens under N.C. Gen. Stat. §§ 44-49 and 44-50, which attorneys are legally bound to honor.

For these reasons, refusal to execute a letter of protection is not only permissible but ethically compelled.