Why plaintiffs prefer contingent fees and defendants don’t.
Contingent fees, in which the attorney earns a fee based on a percentage of whatever is recovered for the client, are typical in personal injury cases both in Georgia and throughout the United States.
We often explain the advantages in terms of making representation attainable for average people and giving the lawyer an incentive to get the most favorable outcome for the client.
Now a study by professors at the University of Jerusalem, "Neither Saints Nor Devils: A Behavioral Analysis of Attorneys’ Contingent Fees," reaches a conclusion that is contrary to common economic wisdom. They conclude:
- Loss aversion (rather than risk aversion or incentivizing the lawyer to win the case) plays a major role in clients’ preferences for contingent fees.
- Facing a choice between a mixed gamble and a pure positive one, plaintiffs prefer contingent fees even if it yields an expected fee that is several times higher than a non-contingent one.
- Defendants, who face a choice between two pure negative gambles, are typically risk seeking and prefer fixed fees.
- Information problems and lack of alternatives are not big factors in clients’ choice of fee arrangement.
- Counter-intuitively, people often judge contingent fee arrangements that yield a low effective hourly rate for the lawyer as more unfair than contingent fee arrangements that yield a high effective hourly rate.
After practicing law for 32 years, including a general practice representing individuals and small businesses, an insurance defense practice where nearly all our work was on hourly fee billings, and a plaintiffs’ practice that is nearly all contingent fee based, I think this study makes sense in business and commercial cases as well as personal injury cases.
Ken Shigley is a trial attorney in Atlanta, Georgia who has been listed as a "Super Lawyer" (Atlanta Magazine), among the "Legal Elite" (Georgia Trend Magazine), and in the Bar Register of Preeminent Lawyers (Martindale), and is a Certified Civil Trial Advocate of the National Board of Trial Advocacy,. Mr. Shigley has extensive experience representing parties in trucking and bus accidents, products liability, catastrophic personal injury, wrongful death, brain injury, spinal cord injury and burn injury cases. Currently he is Secretary of the 40,000 member State Bar of Georgia.