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.