Contingency Fees – Tips to protect yourself

What is a contingency fee?

To represent an injured party, a personal injury attorney typically charges 33-50% of any recovery the attorney receives on behalf of the injured party. This charge is called a “contingency fee”. The contingency fee is usually closer to 33% when an attorney settles an injured party’s case before the attorney files a lawsuit. If an attorney chooses to file a lawsuit, the contingency fee typically increases to 40-50% to compensate the attorney for the additional time and expense spent on the case. If an attorney is unable to recover anything on behalf of an injured party, the injured party pays the attorney nothing, except when the injured party agrees to reimburse the attorney for expenses incurred.

Does an injured party always need an attorney?

Not always. An injured party should always consult with an attorney to weigh options. Sometimes a responsible party’s liability carrier offers a settlement directly to an injured party. For example, an injured party, before hiring an attorney, is offered $12,000 from the responsible party’s liability carrier. The injured party meets with an attorney, who for a 33% contingency fee, estimates he or she could likely recover about $15,000 from the responsible party’s liability carrier. The injured party would recover the following under each scenario:

Without an attorney: $12,000.

With an attorney: $15,000 – $5,000 ($15,000 x .33) = $10,000.

In this example, the injured party would receive less with an attorney than without. Before an injured party hires an attorney, an injured party should ask an attorney about the likelihood the injured party will receive a higher offer if the injured party hired the attorney. An injured party can even ask an attorney to structure the contingency fee so that the attorney only receives a fee on the additional amount the attorney secures. An injured party must remember that a contingency fee comes out of the injured party’s settlement – the contingency fee is not tacked on and paid by the responsible party’s liability carrier.

An injured party should scrutinize an attorney’s proposed contingency fee before the injured party signs a contingency fee agreement with an attorney. An attorney should never guarantee a case’s value. However, an attorney should be able to provide a rough estimate of a case’s value. An injured party should question a prospective attorney: (1) whether the responsible party has or will likely deny responsibility; (2) whether the responsible party has insurance and if so, how much; (3) how much personal injury experience the attorney has; (4) whether the attorney or the attorney’s assistants will answer the injured party’s calls; and (5) how much time and expenses the attorney anticipates will be spent on the case.

Watch for unreasonable contingency fees!

In some cases, a contingency fee is unreasonably favorable to the attorney. For example, an injured party suffers significant injuries and medical bills totaling $100,000 as the result of an accident where fault lies clearly on the responsible party. Further, the responsible party  carries $100,000 in liability insurance, enough to cover the injured party’s medical bills. The injured party hires an attorney at a 33% contingency fee. The attorney simply requests and gathers the accident report, the injured party’s medical records and bills, and submits the records to the liability insurance company. Because the value of the injured party’s case easily exceeds the responsible party’s policy limits, and the accident was clearly the responsible party’s fault, the liability insurance company quickly tenders $100,000 to the injured party’s attorney. Even though the attorney performed relatively little work on the case, the attorney is paid $33,333 out of the settlement based on the 33% contingency fee agreement.

All cases are different. Some higher value cases may indeed require the attorney spend significant time and expense on a case, so that a $33,333 fee is reasonable compensation for the attorney’s time and expense. And remember, an attorney risks not being paid anything on an unsuccessful case. Nevertheless, an injured party should carefully examine his or her case and question an attorney prior to entering into a contingency fee agreement. An injured party may be able to negotiate a lower contingency fee or an hourly fee payable out of the settlement proceeds.

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