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RE: Advisory
Opinion 96-01
Arkansas
Bar Association
DATE: October
9, 1996
SUBJECT:
Confidentiality and Title Insurance Companies
This
committee has been asked to evaluate the request of
a title insurance company directed to an attorney
in private practice. To approve the attorney as a
closing attorney for the title insurance company,
the company wishes authority to examine any files
on real estate closings handled by the attorney (or
any other attorney in the office). This review would
be conducted at regular intervals. The examination
would include three types of files: 1) closings in
which the title insurance company issued a policy
and the firm represented the company; 2) closings
in which the company issued a policy through the firm
or through another agency, and the firm represented
one of the participants; and 3) closings in which
the company was not involved in any way, but the firm
represented a participant. The examination would include
an audit of both the real estate file and the attorney's
trust account.
Rules:
The governing standard on confidentiality is found
in Ark. Rule of Professional Conduct 1.6 (a) : "A
lawyer shall not reveal information relating to representation
of a client unless the client consents after consultation,
except for disclosures that are impliedly authorized
to carry out the representation, and except as stated
in paragraph (b). "
The
scope of the rule of confidentiality is intentionally
broad. The rule encourages people to seek legal assistance
and facilitates the complete development of facts.
Clients have a reasonable expectation that information
relating to the client will not be disclosed by the
attorney. See Scope, Ark. R. Prod. Cond.
The
duty of confidentiality extends to both written and
oral information. The duty extends to all information
relating to the representation, regardless of its
source or its degree of confidentiality. The duty
protects innocent or neutral information, as well
as potentially damaging or embarrassing information.
The financial transactions of a client may not be
embarrassing, but they are certainly private.
Nothing
in Rule 1.6 or the accompanying comments permits an
attorney or firm to disclose information about clients
to third parties. Nothing permits disclosure to title
insurance companies merely because they may have issued
a policy on the real property in issue. Nothing in
Rule 1.6 or Rule 1.15 permits a third party to audit
the attorney's trust account.
Application:
In light of the lack of the specific guidelines in
the rules, these general principles must be applied
to the three factual situations posed above:
1)
The relationship between the title insurance company
and an attorney writing title insurance for that company
may be viewed as a principal and agent relationship.
When an attorney is acting as closing or escrow agent
in an insured closing, there is only the principal/agent
relationship between the attorney and the title insurance
company. Records and information involved in underwriting
title insurance will be disclosed by the attorney
to the title insurance company because of the principal/agent
relationship between them. There is no attorney/client
relationship with other parties that would give rise
to a duty of confidentiality between the attorney
and other parties to the transaction.
2)
If the law firm is representing one of the participants
to the transaction, and the title insurance is issued
by the attorney or another agency, the attorney faces
a conflict of interest under Rule 1.7(b). Even if
the attorney is not writing the insurance policy for
the transaction, the attorney still has an on-going
relationship with the title insurance company. This
relationship must be disclosed to the client before
the title insurance is issued, and the client must
consent to this relationship.
In
a real estate transaction, many disclosures of information
are "impliedly authorized" under Rule 1.6.
Many of the documents become a matter of public record.
For example, the deed and mortgage are filed for record,
and the purchase price is disclosed by the amount
of revenue stamps on the deed. Other documents, such
as the offer and acceptance and the closing
statement, are disclosed to parties who are not within
the attorney/client relationship. The other parties
to the transaction (the closing agent, the title insurance
company, the real estate agents and, sometimes, the
insurance carrier) receive information about the transaction
that is "impliedly authorized" by the client.
When a client permits the attorney to issue title
insurance, he consents (either impliedly or expressly
under Rule 1.6 (a)) to disclosure of the information
needed to secure the insurance.
Once
consent is given, the documents relating to the underwriting
of the title insurance are subject to disclosure to
the title insurance company. Other documents, including
the attorney's work product, that come within the
scope of the attorney's agency relationship with the
title insurance company are also subject to disclosure.
3)
Communications between the attorney and client when
the title insurance company is not involved in any
manner are clearly not subject to disclosure. Unlike
the second scenario, in transactions in which the
title insurance company has no involvement it is particularly
inappropriate for the attorney to seek client consent
to disclosure of records to a third party when the
purpose benefits only the attorney and not the client.
Trust
Account: In all three scenarios, the proposed
audit of the trust account raises other problems.
The trust account most likely will include funds from
clients who have sought legal assistance in family
law matters, criminal defense trials, personal injury
claims and other non-real estate matters. An audit
of a trust account would invade their expectations
of privacy also.
To
audit or examine the trust account, not only would
client consent be required, but the trust account
itself would have to be limited to clients who have
consented. Perhaps a separate trust account could
be established for closings in which the title insurance
company is participating, and in which the clients
have consented.
In
conclusion: The attorney may disclose information
to the title insurance company in two situations:
(1) the attorney is acting only as escrow agent in
an insured closing; and (2) in an insured closing
the client consents to the conflict of interest and
the disclosure is limited to underwriting information
necessary to evaluate title and issue the title insurance
commitment and policy. In the absence of such consent
and safeguards, this committee concludes that permitting
the title insurance company to examine files and trust
accounts violates both the letter and spirit of Rule
1.6.
NOTICE
"This
is an opinion only of the Arkansas Bar Association
which is a voluntary association of attorneys licensed
to practice in the State of Arkansas, and reliance
thereon is voluntary and relieves any Association
member from liability for the content hereof. This
opinion is intended to be the Association's best interpretation
of the Model Rules of Professional Conduct as promulgated
by the Supreme Court of Arkansas as that code applies
to the written facts presented to the Committee. "
ARKANSAS BAR ASSOCIATION
By:_______________________________
Howard W. Brill
Reporter for Professional
Ethics
and Grievances Committee
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