When hiring a personal injury attorney, it’s common for the attorney to work on a contingency fee basis. A contingency fee means you don’t have to pay the attorney any legal fees unless you win your case or secure a settlement with the defendant or his insurance company.
The attorney’s contingency fee, paid at the end of the engagement, will be a percentage of the amount recovered, typically between 20% and 40% of the final award. Many fee structures will use different percentages depending on how soon the attorney settles the case or whether it has to go to trial.
While this fee structure helps make it easier for an injured person to secure competent legal representation, you must understand how the fee is calculated before signing an engagement letter.
The net amount of money you take home will depend on whether the attorney calculates their fee based on the gross or net amount of the settlement.
Gross vs. Net Method of Calculating Contingency Fees
Gross Method
Under the gross method, the attorney calculates their contingency fee based on the total award amount before deducting any legal costs, expenses, medical liens, health insurance liens, or other amounts.
This means the attorney’s fee comes out of the total settlement, and then any case-related expenses (such as court fees, expert witness fees, medical records, etc.) are deducted from your remaining share.
Example of Gross Method
Let’s say you were involved in a car accident and were not at fault. Your attorney gets a settlement from the other drivers’ insurance company for $150,000, and your attorney’s contingency fee is 35%.
You signed an engagement letter stating that the attorney calculates their contingency fee before deducting expenses or disbursements. Throughout the representation, the law firm advanced certain case-related expenses. The related legal costs and other required disbursements are the following:
- Reimbursed advanced legal costs: $6,000
- Medical expenses lien: $8,000
- Health insurance lien: $25,000
- Pre-settlement loan: $3,000
The total other disbursements are $42,000. Under the gross method, the attorney takes their contingency fee of $52,500 (35% times $150,000), which leaves $97,500 remaining. After deducting the remaining disbursements of $42,000, you’ll receive a check for $55,500.
The gross method results in the attorney receiving the highest possible fee amount.
Summary of the Gross Method Calculation
- Gross Settlement Amount: $150,000
- Attorney’s Fee of 35%: $52,500
- Net Payment to You: $55,500
Net Method
Under the net method calculation, the attorney calculates their contingency fee after all expenses and disbursements are deducted from the settlement. As a result, the contingency fee is generally lower under the net method versus the gross method.
Example of Net Method
Let’s use the same example from above. Your total settlement is $150,000, with $42,000 of other disbursements, for a net amount of $108,000.
Under this scenario, the attorneys deduct the disbursements before calculating their fees, so their 35% contingency fee is $37,800 (i.e., $108,000 times 35%). After deducting the contingency fee, the net disbursement to you is now $70,200, instead of the $55,500 under the gross method.
Summary of the Net Method Calculation
- Gross Settlement Amount: $150,000
- Attorney’s Fee of 35%: $37,800
- Net Payment to You: $70,200
Some attorneys may use a hybrid calculation that utilizes both methods.
For example, the fee arrangement may state that the contingency fee is calculated after deducting advanced legal costs, but before accounting for any disbursements related to liens for medical expenses, health insurance reimbursements, or other pre-settlement loans.
Under this calculation, the attorney would deduct $6,000 of advanced expenses from the gross settlement of $150,000. The contingency fee is now $50,400 ($144,000 times 35%). After deducting the remaining disbursements of $36,000, your new net payment is $57,600.
Notice how the net payment to you changes based on the change what expenses are deducted before calculating the contingency fee.
Which Method Should You Choose?
When hiring a personal injury attorney, it’s essential to ask the attorney how they calculate their contingency fee and get them to provide an example calculation. Read our blog post “Top 5 Things to Consider When Picking a PI Lawyer” for more information on the decision process.
Although the lawyer may memorialize the terms in an engagement letter, it is often still confusing to most new clients because this is their first experience with these types of contracts.
Conclusion
Understanding the difference between the gross and net methods of calculating contingency fees is helpful before hiring a personal injury attorney. Many law firms will have a default fee arrangement; however, if you disagree with their proposed fee structure, you can negotiate to change the terms.
By asking the right questions and knowing how attorneys calculate their fees and terms for reimbursed advanced expenses, you can make an informed decision and ensure you get the best possible outcome for your case.