Except for large businesses and wealthy individuals, most potential plaintiffs do not have the money to pay the costs associated with litigation. There are third- party payers in law, but they are insurance companies, which usually limit their payments to defense lawyers. Since few people have the resources to hire an attorney on an hourly basis, persons with valid personal injury claims would be denied their day in court if this were the only payment system. This would be an injustice. The solution adopted in the United States is the contingent fee contract. In this arrangement, attorneys take a percentage of the winnings as their fee. The clients make their claims, the attorneys have a chance to earn a fee, and the contingency aspect gives attorneys added incentive to work hard for their clients.

If the lawyer works for a contingent fee, the fee must cover three costs of litigation. The first is the out-of-pocket costs and the salaries for the support personnel in the lawyer’s office. Out-of-pocket costs include filing fees, court reporters, expert witness fees, copying charges, and payments for other goods and services necessary to prosecute a case. The second is the value of the attorney’s time. In a contested malpractice case, the attorney may invest hundreds of hours of work that will never be paid for if the suit is unsuccessful. The third component is economic value of accepting the uncertainty and delay in litigation.

The contingent fee contract provides that the fees will be paid out of the money received from the defendant when a case is won or settled. Most contracts also provide that the attorney will loan the client the money to pay the out-of- pocket expenses of the case. Although the money for these expenses is styled as a loan, few attorneys attempt to collect it from the client if the recovery is less than the expenses in the case. The attorney’s fee is based on a percentage of the gross recovery, without regard to the number of hours actually worked on the case. The fees are typically staged—perhaps 33% if the case is settled without filing a lawsuit, 40% after a lawsuit is filed, and 45% if the case must be defended on appeal. Most cases are settled after the filing of a lawsuit but before the rendering of a judgment by a court. Under this schedule, the attorney would receive 40% of the settlement and would be reimbursed for expenses out of the client’s share.