Lawyers take cases on contingency because the math works for both sides: the client pays nothing up front and owes nothing if the case loses, and the attorney collects a percentage large enough on winning cases to cover the ones that go nowhere. The typical fee runs 33% to 40% of the recovery. On a $300,000 settlement with a 33% fee, that is $99,000 for what might have been six months of work, and that upside is what funds the firm through the cases it loses.
The arrangement is a business decision, not charity. The attorney invests the firm’s time and money with no guarantee of return, and screens cases accordingly. Below is what makes the model function, how lawyers decide which cases to take, and what a client actually walks away with when a case settles.
The Upside That Makes It Work
A lawyer billing by the hour gets paid whether the case wins or loses. A lawyer on contingency gets paid only out of the recovery, so a few strong results have to cover a lot of ground. The percentage usually climbs as the case moves through more expensive stages:
- Pre-litigation, before a lawsuit is filed: roughly 33%
- After filing but before trial: 35% to 37.5%
- At trial or on appeal: 40% or higher
Settling through a demand letter and a few rounds of negotiation costs the firm far less than taking a case through discovery, depositions, motions, and a multi-day trial, and the escalating fee reflects that. Some states cap contingency percentages in certain case types, particularly medical malpractice, where sliding-scale limits are common.
The percentages are not fixed. Lawyers expect to be asked, and some will agree to a lower rate if the case is strong, the expected recovery is large, or the client has already assembled records and documentation. One structure that works in practice: a lower percentage, such as 25%, if the case settles before a lawsuit is filed, stepping up to the standard rate if litigation becomes necessary.
Why Clients Get the Deal
Someone dealing with a serious injury is often buried in medical bills, unable to work, and staring down a well-funded insurance company or corporation with a full-time legal team. Hiring a lawyer at $300 to $500 an hour is not realistic in that situation. Contingency removes the upfront cost barrier entirely, so the strength of the claim determines whether someone gets a lawyer rather than the size of their bank account.
That matters most against defendants with deep pockets. An individual plaintiff needs expert witnesses, depositions, and months of legal work just to get to the negotiating table. Without the contingency model, most of these cases would never be filed. The arrangement shifts the financial risk from the injured person to the attorney, who is in a far better position to absorb it.
How Lawyers Decide Which Cases to Take
Because the firm is gambling its own resources, lawyers screen contingency cases carefully. A sympathetic client with a sad story is not enough. Three questions drive the decision, and weakness in any one of them can be enough for a lawyer to decline.
Can Fault Be Proven?
The attorney needs confidence that the other party can be shown to be liable. A rear-end car accident with a police report blaming the other driver is an easy call. A slip-and-fall with no witnesses and no incident report is a harder sell. Lawyers reject cases with murky liability all the time because the risk of losing at trial and recovering nothing is too high.
Are the Damages Big Enough?
The potential recovery has to justify the investment. If a case will cost $50,000 to litigate and the realistic recovery is $60,000, the math does not work for anyone. Attorneys evaluate medical bills, lost income, long-term disability, and the severity of pain and suffering to estimate what a jury or insurer would realistically pay. Cases with minor or short-lived injuries are often declined because the fee would not cover the cost of pursuing them.
Can the Defendant Actually Pay?
A winning verdict is worthless if the defendant has no insurance and no assets. Before taking a case, lawyers investigate whether the defendant carries liability insurance, owns property, or has other resources that could satisfy a judgment. Cases against uninsured individuals often fall apart here, no matter how strong the evidence of fault.
Fees Are Not the Only Thing Coming Out of Your Recovery
The contingency percentage covers the attorney’s time. It does not cover the out-of-pocket expenses required to build the case, and those costs are separate:
- Court filing fees, typically $55 to $435 depending on the jurisdiction
- Expert witness fees, often thousands of dollars for medical experts or accident reconstructionists
- Deposition costs: court reporter fees, transcripts, and videography
- Medical record retrieval from hospitals and imaging providers
- Investigation costs, including private investigators and process servers
How these are handled varies by firm. Some attorneys advance all litigation costs and only seek reimbursement if the case succeeds. Others require the client to pay certain expenses as they arise, win or lose. The fee agreement controls which model applies, so ask during the initial consultation.
Gross vs. Net Fee Calculation
One of the most consequential details in any contingency agreement is whether the attorney’s percentage is calculated on the gross recovery (the total settlement) or the net recovery (after litigation expenses are subtracted). Most firms calculate on the gross. On a $100,000 settlement with a 33% fee and $5,000 in costs:
- Gross method: the attorney takes $33,000, then $5,000 in costs is deducted, leaving the client with $62,000.
- Net method: costs are subtracted first ($95,000), then the attorney takes 33% of that ($31,350), leaving the client with $63,650.
The gap widens as costs climb. On a complex case with $30,000 or more in expenses, the method can shift thousands of dollars. Read this provision carefully before signing.
The Order Money Comes Out of the Settlement Check
When a case resolves, the settlement does not go directly to the client. It is deposited into the attorney’s trust account and distributed in order:
- Attorney fees, deducted first under the gross method or after costs under the net method
- Litigation costs the firm advanced
- Medical liens and insurance reimbursement to hospitals, health insurers, Medicare, Medicaid, and workers’ compensation carriers
- Pre-settlement funding, if the client took out a lawsuit loan, repaid with interest
- The client’s share, whatever remains
Medical liens can take a large bite. If a health insurer paid $80,000 in treatment related to the injury, it may assert a right to recover that amount from the settlement. Employer-sponsored health plans governed by federal law often have especially strong reimbursement rights that state laws cannot override. A good attorney will negotiate liens down, and many are reducible, but the gross settlement figure is never what the client takes home.
Where Contingency Fees Are Not Allowed
Ethics rules draw hard lines around certain case types. Lawyers are prohibited from charging contingency fees for criminal defense, where an attorney’s payment cannot depend on securing an acquittal. The same prohibition applies to most domestic relations matters, including divorce, alimony, and child custody disputes, where the outcome is not a monetary award.1American Bar Association. Model Rules of Professional Conduct Rule 1.5 – Fees The written fee agreement itself is also required: it must spell out the percentage at each stage, which expenses are deducted from the recovery, and whether those expenses come out before or after the fee is calculated.
The Tax Trap on Taxable Settlements
For physical injury cases, the tax picture is clean. Compensatory damages for personal physical injuries or physical sickness are excluded from gross income under federal tax law, covering medical expenses, pain and suffering, lost wages tied to the injury, loss of enjoyment of life, and disfigurement.2Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Emotional distress damages are tax-free only when they flow from a physical injury. Punitive damages are almost always taxable, as are settlements for defamation, harassment, or employment discrimination without a physical injury component.
Here is what blindsides many plaintiffs. Under the Supreme Court’s decision in Commissioner v. Banks (2005), the IRS taxes you on the entire settlement amount, including the portion your attorney takes as a contingency fee. On a $500,000 taxable settlement with $165,000 going to the lawyer, you owe taxes on the full $500,000. For physical injury cases this does not matter, because the whole settlement is tax-free. For taxable settlements it can be devastating.
Congress carved out a fix for employment-related claims. Attorney fees paid in connection with discrimination, whistleblower, and other employment law claims can be deducted above the line, so you effectively pay tax only on the amount you keep.3Office of the Law Revision Counsel. 26 USC 62 – Adjusted Gross Income Defined For other taxable settlements outside that provision, there is currently no deduction available for contingency fees paid. The old miscellaneous itemized deduction that once covered them was eliminated and has been made permanent. If your claim will produce taxable damages, work through the numbers with a tax professional before settling.