How Contingency Fees Will Affect Your Final Settlement Payout

Most attorneys are paid by the hour. Whether they’re writing contracts, drafting wills, defending criminals, or advising businesses, attorneys’ fees usually begin with a down payment, called a retainer, and continue at an hourly rate.

Compensation for personal injury attorneys is different. They don’t require down payments or charge by the hour. They even pay money out of their own pockets to finance their clients’ cases. Personal injury attorneys take calculated bets. They accept cases hoping they will pay off sometime in the future. Often they do, but not always.

Contingency Fee Agreements

Through advertising or word of mouth, you may have learned that personal injury attorneys aren’t paid unless they win your case. If they win, you only have to pay them one-third of the total amount. And if they lose, you owe them nothing. This is called taking the case on a contingency fee basis.

A law firm’s compensation is set out in a contract called a fee agreement, which you’ll have to sign. This agreement details how your attorney will be paid and the exact amounts (by percentage) you’ll both receive when your case is over.

Most personal injury clients think a contingency fee means their attorney will get one-third of the final settlement, and the client will get the other two-thirds. But it’s a little more complicated than that. There are other fees and costs that affect the amount, often lowering the client’s payout substantially.

By law, your attorney must tell you how her fee is earned, but you’re responsible for reviewing and understanding the fee agreement before you sign it. It’s a legal contract that sets out the exact amount of your attorney’s compensation. Once you sign it, you’re bound by its terms.

Some attorneys are better than others at explaining the terms of their contingency fee agreements. Some will sit down and carefully go over each section with the client. Others give no explanation at all, simply having their secretary type up an agreement to give to the client.

When you’re presented with a contract, take your time and read it thoroughly. You can even take it home overnight to review it. As you do, write down any questions about legal terms or passages you don’t fully understand. Don’t be embarrassed. Most of the language in fee agreements is so convoluted even some attorneys don’t fully understand it.

Costs

Costs are the expenses your attorney pays while preparing and negotiating your case. The amounts normally include office and copying costs, deposition expenses, expert testimony, etc. They are deducted from the total settlement after a case is won. The costs are deducted first, before the attorney takes his fee.

If your attorney isn’t successful at settling your case or winning it at trial, you won’t have to pay any of these costs.

Medical Liens

Your attorney is legally obligated to deduct and pay all medical liens before you receive any settlement money. These include medical bills from hospitals and doctors who provided treatment to you based on letters of protection, and any other providers who deferred payment for your treatment until the case was finalized.

A Letter of Protection is a letter sent by your attorney to one or more of your medical providers promising to pay them for your treatment. They are promised payment out of your settlement funds or the amount awarded after a trial or arbitration.

The letter of protection is a binding contract between your attorney and the treatment provider. A breach of that contract can subject your attorney to a lawsuit from the provider as well as disciplinary action from the state bar.

The Fine Print

Like most contracts drafted by attorneys, there’s always fine print in fee agreements. Be sure to read the entire agreement, and you should pay especially close attention to the clauses that control your payout. Remember, if you have questions about these clauses or any others, ask your attorney for a full explanation.

Typical clauses found in contingency fee agreements cover the deduction of costs and medical liens, as well as the net amount a client will receive. Below we’ve provided examples of typical clauses that have been simplified to make them easier to understand.

Costs Clause Example

Attorney will advance all Costs in connection with Attorney’s representation of Client under this agreement. Attorney will be reimbursed out of the client’s gross settlement amount, court verdict, or arbitration award before any money is paid to the client.

If there is no settlement or award after a trial or arbitration hearing, or if the amounts of the settlement, court verdict, or arbitration award are insufficient to reimburse Attorney in full for costs advanced, Attorney will bear the loss and Client will owe nothing.

Law firm compensation costs include, but are not limited to: court filing fees, deposition costs, expert fees and expenses, investigation costs, long-distance telephone charges, messenger service fees, photocopying expenses, and process server fees.”

Medical Liens Clause Example

Items which are not Costs, but which must first be paid out of the client’s settlement, court verdict or arbitration award before any money is paid to client are any medical or therapeutic treatment expenses incurred by Client which have not yet been paid and which are directly related to the client’s treatment. These medical and treatment expenses include, but are not limited to: physicians, hospitals, therapists, chiropractors and other like providers.

These expenses shall be deducted regardless of the existence of a Letter of Protection between the attorney and provider. The expenses shall include any legitimate medical, hospital, therapeutic or chiropractic amounts known to Attorney.”

Net Amount to Client Clause Example

Client will receive the amount remaining after costs, attorneys fees and medical or other legitimate liens are deducted from the “total amount” of the settlement, court verdict or arbitration award. That amount will be considered the “net amount” which is due and payable to Client.”

Will you pay 33 or 40 percent?

Most contingency fee agreements for settling a personal injury claim set the attorney fees at 33.3 percent, or one-third, after expenses are deducted. When a claim can’t be settled and must be tried in court, attorney’s fees usually increase from 33.3 percent to 40 percent.

Lawsuits and arbitration require additional time and money. It can take months for a case to be tried in court and almost as long to have it arbitrated. Preparing for trial or arbitration always requires some amount of pre-trial discovery. This includes:

• Preparing and filing extensive legal pleadings
• Attending court hearings
• Depositions of the at-fault party and witnesses

Depositions require court reporters, who can charge anywhere from $5.00 to $7.00 per page just to take down what the deponents say. They charge additional amounts for copies, certified transcripts, court filing, etc. Court reporter fees can have a substantial effect on a law firm’s overall compensation. It’s not unusual for a deposition to cost over $500 per day.

Expert witnesses are also expensive. Depending on the type of case and expertise required, an expert witness can cost $1,000 or more per day.

Other pre-trial activities include interrogatories, requests for production, legal briefs, and more. These all represent time and resources your attorney continues to spend with no guarantee of reimbursement.

Case Studies:

Lawsuit Seeking Repayment of a Retainer Fee
In this legal malpractice lawsuit, the plaintiff seeks partial repayment of her divorce attorney’s retainer. She asserts her attorney over billed her for the services he provided.

Claim Against a Law Firm For Mishandling a Case
In this legal malpractice claim, a plaintiff going through a divorce sues her law firm for failing to secure collateral to a transferred home, causing her to lose the home to foreclosure.