Contingency fee agreement: what your lawyer's percentage really costs you

A contingency fee agreement is a written contract under which your lawyer is paid a percentage of whatever you recover, and nothing at all if you recover nothing. It is what makes personal injury litigation possible for people who could not fund a case hourly. The percentage itself is usually the part clients focus on, and it is usually not the part that decides their cheque. Case expenses, medical liens, and one short clause about whether expenses come out before or after the fee is calculated can move the net figure by tens of thousands of dollars on the same headline settlement.

This piece is about reading that document properly before you sign it, and about reading the closing statement properly at the other end.

What the agreement is required to say

Under the professional conduct rules adopted in substantially similar form across US states, a contingent fee agreement has to be in writing and signed by the client. It has to state the method by which the fee will be determined, including the percentage that applies if the case settles, the percentage if it goes to trial, and the percentage if it goes to appeal. It has to identify the litigation and other expenses that will be deducted from the recovery, and — this is the important one — whether those expenses come out before or after the contingent fee is calculated. It also has to tell you clearly about any expenses you will owe even if you lose.

At the end of the matter the lawyer owes you a written statement showing the outcome and, if there is money, the remittance to you and how it was worked out.

Two categories of case are off-limits for contingency fees entirely. A lawyer cannot take a fee contingent on securing a divorce, or on the amount of alimony, support or a property settlement in a domestic relations matter. Nor can a criminal defence lawyer be paid contingent on the outcome.

Your state's version of these rules may go further than the model. Several states require specific disclosure language, a cooling-off period, or a client's right to have the agreement reviewed. Some impose sliding-scale caps in medical malpractice claims, so that the percentage falls as the recovery rises. Claims against the federal government under the Federal Tort Claims Act are subject to a statutory fee cap, and Social Security disability representation is capped by a formula the Social Security Administration sets and updates. If your case is in one of those categories, the market percentage is irrelevant — the cap governs.

Gross to net: the sequence that decides your cheque

Every settlement runs through the same sequence. What varies is the order of steps two and three, and what falls into each bucket.

1. The gross settlement arrives and is deposited into the law firm's client trust account
2. The attorney fee is calculated
3. Case expenses are reimbursed to the firm
4. Liens and subrogation claims are paid — health insurer, Medicare or Medicaid, hospital, workers' compensation carrier
5. Any outstanding balance on a pre-settlement advance is repaid
6. What remains is disbursed to you

Here is an illustrative worked example on a $300,000 settlement, using round assumptions rather than real case data:

Line	Fee calculated on gross	Fee calculated after expenses
Gross settlement	$300,000	$300,000
Case expenses	$40,000	$40,000
Fee base	$300,000	$260,000
Attorney fee at 33.3%	$100,000	$86,667
Expenses reimbursed	$40,000	$40,000
Medical liens	$45,000	$45,000
Net to client	$115,000	$128,333

Same lawyer, same settlement, same percentage. A difference of roughly $13,000 produced by a single clause. These figures are an illustration only; percentages, expense levels and lien amounts vary widely by case and by state, so run your own numbers rather than relying on these.

The gap widens as expenses rise. In an expensive case — competing expert witnesses, accident reconstruction, a long deposition schedule — expenses can reach six figures, and the before-or-after question becomes the single most valuable term in the document.

What counts as an expense, and who carries it

Fees are what the lawyer earns. Expenses are what the case costs. The two are separate, and the agreement should list the second category rather than leaving it open.

Typical case expenses include filing and court fees, service of process, deposition transcripts and court reporters, expert witness fees, medical record retrieval, investigators, exhibits, mediator fees and travel. Many firms advance all of these and recover them from the settlement. Others ask the client to fund some directly.

Three questions worth asking before you sign:

• Do I owe expenses if we lose? In most personal injury practice the firm absorbs them, but the agreement can say otherwise and some do.
• Is interest charged on advanced expenses? Some agreements permit it. Over a case that runs three years, that is real money.
• Are in-house charges marked up? Photocopying at a per-page rate, or a flat "case management fee", should be visible in the agreement rather than appearing for the first time on the closing statement.

Note that a pre-settlement advance is not a case expense and is not covered by any of this. It sits outside the fee agreement entirely, carries its own cost, and is repaid from your share. The economics of those arrangements are set out in pre-settlement funding.

Where the percentage typically moves

Most contingency agreements are tiered rather than flat. A common shape is one rate if the matter resolves before a lawsuit is filed, a higher rate once suit is filed or the case reaches trial, and a higher rate again on appeal. That structure is defensible — a trial costs the firm far more than a demand letter — but it does create a point of tension at the moment a settlement offer arrives shortly before the step-up date.

Read the trigger carefully. "Upon filing suit" and "upon the commencement of trial" are very different moments, and a case that settles between them is priced differently depending on which the document uses.

The tax question people find out about too late

For a settlement of a physical injury or physical sickness claim, the whole thing is generally outside your income under the exclusion in section 104(a)(2), so the fee allocation does not create a tax problem. That is the common case, and it is set out more fully in are lawsuit settlements taxable.

For a taxable recovery, the position is uncomfortable. The Supreme Court held in Commissioner v. Banks that the portion of a recovery paid directly to a contingent fee lawyer is generally still income to the client. You are taxed on the gross, not on what reaches your bank account. Congress created an above-the-line deduction that fixes this for certain claims — unlawful discrimination claims in particular — but it does not extend to every taxable case, and the courts have declined to read it broadly. Outside those categories, miscellaneous itemized deductions have been eliminated under current law, so there may be no deduction available for the fee at all.

The practical consequence is that a taxable settlement can leave a client owing tax on money the lawyer received. Where that risk exists, it needs to be modelled before the settlement is agreed, not in the following April. It is also one of the arguments for periodic payments: spreading a taxable recovery across years through a structure can change the rate at which each slice is taxed, and the non-qualified variants that do this are described in non-qualified structured settlement.

Reading the closing statement

The written statement you receive at the end is the document that matters most and gets the least attention. Check it line by line:

• Does the gross figure match the settlement agreement?
• Is the fee calculated on the base the agreement specifies, before or after expenses?
• Is every expense itemised, or is there a lump "costs" line with no detail behind it? You are entitled to the detail.
• Does each lien figure match a written reduction letter from the lienholder? Liens are routinely negotiated down, and a reduction your lawyer obtained should appear as the reduced number.
• Is anything still being held back? A holdback for an unresolved lien is normal, but it should be identified, quantified and have a date attached.

If you intend to take part of the recovery as periodic payments rather than cash, that decision has to be made before the release is signed, not afterwards — the timing point is covered in how long does it take to get settlement money.

This article is educational and not personal financial, tax or legal advice. Fee rules, caps and lien practice vary by state and by claim type; confirm the position that applies to your case with your own attorney or a qualified professional before acting.

Contingency Fee Agreement: Frequently Asked Questions

Is the percentage negotiable?

Sometimes, and it costs nothing to ask. Where liability is clear and the insurer's policy limit is modest, a case may settle on a demand letter with very little work, and some firms will price accordingly. Where the case is difficult or the firm is carrying six figures of expenses for years, there is much less room. What is more often negotiable than the headline percentage is the before-or-after expense clause, which as the table above shows can be worth more than a point or two on the rate.

Can I change lawyers partway through?

Generally yes — a client can discharge a lawyer — but the first firm does not simply disappear. It will usually assert a lien on the eventual recovery for the value of work already done, and that claim is settled between the two firms out of the same fee pool. The mechanics are state-specific. What you should not assume is that switching firms costs you nothing; ask how the first firm's claim will be handled before you move.

Does the fee come out before or after medical liens?

Almost always before. The attorney fee is calculated on the settlement, and liens are paid from what remains alongside your share. This is why a large unreduced lien can produce the outcome clients find hardest to accept — a substantial settlement where the client's own net is small. Negotiating the liens down is part of the work you are paying for, so ask early what reductions are being sought and from whom. See medical lien on settlement for how those claims are prioritised.

What if I recover nothing?

You owe no fee. Whether you owe expenses depends on the wording of your agreement. Most personal injury firms write it so the client owes nothing in a loss, but that is a commercial choice rather than a rule, and the agreement is required to tell you plainly which way it falls. If the document is not clear on that point, do not sign it until it is.