Avoid This Contingency Fee Trap
One word in your fee agreement with your lawyer can cost you thousands of dollars. The word comes up in the context of contingency fee arrangements. This is where the lawyer get paid on a commission basis—as a percentage of the amount you get. This is how most personal injury cases, such as automobile accident, medical malpractice, and slip and falls, are structured. In this or any kind of commission-based arrangement, you need to pay close attention to how the commission is calculated.
Most advertsing by lawyers who work on a commission basis emphasize that you don't pay them unless you get paid. What they don't emphasize is how their share is calcuated when your case is settled or when you win at trial.
This is where one word—gross—can cost you a bundle. Specifically, there is a huge difference between whether the lawyer receives a commission based on your gross receovery or your net recovery.
The following example illustrates the difference: you are injured in a car accident and sign an agreement with a lawyer that pays the lawyer one third of what you get. The lawyer spends $20,000 to handle your case. Most of that money is paid to expert witnesses such as doctors. If you settle this case for $150,000, how much will you cactually receive? Under most fee agreements, you will be responsible for reimbursing the lawyer for the amounts paid to expert witneses and for other costs, such as court filing fees. Here that amount is $20,000. If your contract says the lawyer gets a gross recovery, the lawyer will be entitled to a third of the $150,000 in addition to the costs. In this case, the lawyer would receive a total of $70,000 and you would get the remaining $80,000. But if the lawyer is contractually entitled to a net receovery, the lawyer will get paid a third of what's left over after the costs have been subtracted out. In this case that would be a third of $130,00 or $43,333. Thus, in this example, under a gross recovery the lawyer gets $70,000 and in a net recovery only $63,333.
The lesson should be clear—make sure that your fee agreement provides that the lawyer receives a percentage of what you get after costs are subtracted out. Go for the net recovery. When a lawyer earns a gross recovery in a contingency cases the result for the client can be gross.
How To Save Money When Hiring A Personal Injury Lawyer
For a personal injury attorney, death is a bummer. That's not because of the tragic loss of human life, a life cut short in its prime, or any of that sentimental stuff. It's because on average a dead client is worth less to the attorney than a severely injured but alive client. This is just one aspect of the topsy-turvy world of hiring a personal injury lawyer. There are a few truths you need to understand to get the best value for your money.
Truth # 1: The personal injury lawyer is the functional equivalent of a commission sales person. They work on a percentage basis.
Truth # 2: The value of your case to the lawyer is primarily dependent on the severity of your injuries. The more severe the injury the more valauable your case.
Truth # 3: A second important component of your value as a client is your earning capacity. The more you were making at the time of the injury and the higher your future potential earnings, the more your case is worth to the lawyer.
Truth # 4: A third important component of your value as a client is how sympathetic you might appear to a jury. A vast majority of personal injury cases settle before trial. You tend to get a higher settlement offer if the defendant is worried about how sympathetic you will look to a jury. This is why a seriosly injured live client is worth more financially than a dead one. The defendant can easily imagine how the jury will react to seeing a cute, wheelchair-bound little girl in the courtroom and will pay more money to avoid that from happening. The fact that the deceased can't be in the courtroom makes their case less valuable.
Truth # 5: From the lawyer's point of you, it doesn't take much more time and expertise to handle a more valauble case. For example, it doesn't take ten times as much work or expertise for a lawyer to work on a case that is worth $1 million compared to one that is worth $100,000. There is some additional work involved, but not as much as the difference in the value of the two cases.
These truths lead to a simple two-step process that will enable you to save money when you negotiate the commission (or contingency fee) that the lawyer will receive. First, estimate the value of your case. You know how much the injured person earns and the extent to which the injury intereferes with or reduces the ability to make money. You also have a sense of serious the injuries are and whether they require a short or extended amount of medical care. You also have a rough sense of how sympathetic the injured person is likley to appear before a jury. This is largely a function of how severely injured they are and what they were doing when they were injured. You don't need to calculate these figures exactly. You just need to get a rough sense of the general ballpark of the value of your case to a lawyer.
Second, and most importantly, the higher the potential value of your case, the more you should insist that the lawyer take a smaller percentage of the amount you receive in settlement or after a jury trial. Many lawyers will charge the same contigency fee regardless of the value of the case. Often that percentage ranges from 33% to 40% of the recovery. You can save many thousands of dollars by negotiating a lower commision rate. If your case is potentially worth $1,000,000, each percentage point of commission is worth $10,000. So don't be shy about negotiating a lower rate; if the lawyer suggests 40%, get them down to 33% or 35%. Remember, the value of your case is primarily depenmdent on the seriousness of the injuries. The more serious the injuries, the more likley it is that you will find a good and experienced lawyer who is willing to take your case and take a lower cut. This is because a single $1,000,000 case is much less work for the lawyer than four $250,000 cases.
There are some additional factors to consider when negotiating with a fee with a personal injury lawyer. One of these factors is how to handle the costs (such as court filing fees) that the lawyer may want you to pay. I'll address these issues in a future blog post, but for now remember that the key to saving money when negotiating with a personal injury lawyer is to focus on the their commission percentage. Do that and you can save tens of thousands of dollars.