Proposed Statute Would Require Payee Notification of Settlement Checks


UPDATE — On October 16, 2009, the VSB Council recommended by a vote of 39 to 25 a statute that would require insurance companies that pay liability claims to notify claimants when the company distributes settlement proceeds of $5,000 or more to claimants’ attorneys. The American Bar Association recommends Payee Notification as a measure to deter lawyers from stealing and to detect thefts sooner. See Payee Notification Proposal

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The Virginia State Bar’s Public Protection Task Force has recommended unanimously that insurance companies be required to notify claimants or judgment creditors – including those who are represented by counsel – that the insurer has issued a payment of $5,000 or more in settlement of a liability claim or judgment.

The proposed notification of settlement – referred to as the Payee Notification Statute by the task force – is designed to deter attorneys from theft and to detect thefts sooner. It addresses situations in which an attorney negotiates a settlement, forges the client’s name to documents and checks, and pockets the money.

The proposal will be considered by the VSB Council at its October 16, 2009, meeting.

A similar proposal was rejected by the council in October 2007.

A month after that vote was taken, the practice of Woodbridge lawyer Stephen Conrad was put into receivership in response to numerous bar complaints about his personal injury practice. The receiver documented over $4 million stolen from hundreds of clients.

Conrad’s law license was revoked and he was sentenced to eleven years in prison. Receivership expenses – paid by the VSB – total more than a half million dollars. The VSB Clients’ Protection Fund now is engaged in the task of investigating client claims, which are expected to exceed the limit of the fund, which is $411,165, or 10 percent per attorney of the net worth of the fund when the first claim was filed.

The Conrad case was one of several lawyer defalcations of settlement funds that have come to light recently.

As a result of these developments, at the request of 2007-08 VSB President Howard W. Martin Jr., the Public Protection Task Force again took up the issue of notification of settlement of liability cases.

The American Bar Association has recommended notification regulations or statutes after concluding that they deter lawyer misconduct, protect the public, and benefit client protection funds. Thirteen states have adopted payee notification measures.

The insurance industry does not object to the proposal, according to a task force member who is a lobbyist for a trade association that represents 1,100 insurance carriers. Currently, insurers are defending themselves against lawsuits from defrauded Conrad clients who are turning to the carriers to make them whole.

Among the objections to settlement notification in 2007 was concern that insurance companies would communicate improperly with represented parties. In response, the task force limited the required notice to a copy of the cover letter or other evidence of payment, sent at the time payment is mailed to the claimant’s attorney.

The claimant’s notification would be mailed to the last address known to the insurance company, rather than an address provided by the attorney, to make diversion of the letter less likely.

Responding to complaints that the requirement unfairly singles out plaintiffs’ attorneys, the task force notes that special rules or statutes have been created to address problems that arise in many areas of law in which a need for public protection has come to light. These include insurance defense, prosecution and defense of criminal cases, real estate settlements, collections, and representation of publically held companies.

While the task force acknowledged that settlement notification would not prevent theft by lawyers who are intent on stealing, it would deter such behavior or lead to quicker detection.

Richard S. Mendelson, the receiver in the Conrad case, related an example of how payee notification protected one Conrad client from theft.

In the example, a father and son had been involved in separate motor vehicle accidents. Both retained Conrad.

In the father’s case, Conrad settled without the client’s knowledge or consent and kept the money. Conrad similarly settled the son’s claim without his knowledge, but the carrier in that case was based in Pennsylvania, which has a payee notification law. When the son received the notice from the insurer, he went to Conrad’s office. Conrad told the client that the money was only an offer. The son said he would accept it, and Conrad wrote him a check from his trust fund.

The father did not find out he had been victimized until the receiver contacted him to review his file.

Comments on this proposal should be submitted in writing to Karen A. Gould, Executive Director, Virginia State Bar, 707 East Main Street, Suite 1500, Richmond, VA 23219, no later than end of business September 28, 2009.

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posted 2/10/09; updated 3/9/09, 6/10/09. 7/30/09, 10/27/09 

Updated: Oct 27, 2009