A contingency fee arrangement in a lawsuit works like this: your lawyer takes an agreed percentage of whatever you recover through settlement or judgment, and if you recover nothing, the lawyer earns no fee for the hours put in. You sign no monthly invoices along the way. The firm advances the work, absorbs the risk of losing, and gets paid out of the money that eventually comes in. That single mechanic is what makes contingency work, and it drives almost every other decision in the agreement you’re about to sign.
The Basic Bargain
You sign a written agreement giving the attorney a set percentage of your eventual recovery. The attorney invests their time, staff, and resources into the case without billing you. Their entire compensation depends on the outcome. If you receive a settlement or jury verdict, the attorney takes their percentage from that money. If the case produces zero, the attorney walks away unpaid.
The model aligns the attorney’s financial interest with yours: a lawyer who only gets paid when you get paid has every reason to maximize your recovery. It also creates a quieter tension in the other direction. A guaranteed payout now eliminates the risk of losing everything at trial, so the same structure that motivates a good result can also nudge a lawyer to settle a case that might do better in front of a jury. Knowing that tension exists helps you have more productive conversations about strategy.
What Percentage Should You Expect
The standard contingency fee is roughly one-third of the recovery. Percentages range from 25 percent to 40 percent depending on the case type and complexity. Many agreements use a sliding scale that increases the percentage as the case advances: a typical structure sets the fee at 33 percent if the case settles before a lawsuit is filed and 40 percent if it goes to trial. Trial preparation and courtroom work simply demand far more attorney time than pre-suit negotiation.
Some agreements adjust the scale based on the size of the recovery. A fee might be 33 percent of the first $500,000 and 25 percent of anything above that. The percentage is not set in stone. Attorneys expect some negotiation, especially when the case is strong or you’ve already done real work — gathered medical records, documented the incident, gotten an initial offer from the insurer before you ever walked in. That reduces the attorney’s workload and gives you leverage to ask for a lower percentage on the pre-litigation phase, with the standard rate kicking in only if formal litigation becomes necessary. The key is to raise the subject before signing. Once you’ve signed, renegotiating is far harder.
Cases That Use Contingency, and Cases That Can’t
Contingency arrangements dominate personal injury law: car accident claims, medical malpractice, slip-and-fall injuries, product liability, and wrongful death. These cases share two features that make the model work — damages are quantifiable in dollar terms, and an insurance policy or deep-pocketed defendant usually stands behind the claim. Wrongful termination, workplace discrimination, and harassment lawsuits are also frequently taken on contingency.
Two categories are off-limits. The American Bar Association’s Model Rules of Professional Conduct, adopted in some form in most states, prohibit contingency fees in criminal defense and in divorce or custody matters where the fee depends on securing the divorce or on the amount of alimony, support, or property the client receives.1American Bar Association. Rule 1.5 Fees – Comment If you’re looking for a lawyer for a criminal case or a divorce, don’t expect contingency to be on the table.
Statutory Fee Caps That Override the Percentage
Some case types carry legislated fee limits that trump whatever percentage an agreement states.
Social Security disability appeals are the clearest example. The attorney’s fee cannot exceed 25 percent of your past-due benefits or $9,200, whichever is less.2Social Security Administration. Fee Agreements That $9,200 figure was set in November 2024 and remains the current cap.
Claims against the federal government have their own limits. Under the Federal Tort Claims Act, an attorney cannot charge more than 25 percent of a court judgment or litigation settlement, or more than 20 percent of an administrative settlement reached before filing suit.3Office of the Law Revision Counsel. 28 U.S. Code 2678 – Attorney Fees; Penalty Violating those limits is a federal crime punishable by a fine up to $2,000, imprisonment up to one year, or both. Several states also impose statutory caps on contingency fees in medical malpractice cases. If your case falls into a category with a legislated fee limit, the agreement must comply regardless of what percentage it states.
What the Written Agreement Must Include
A contingency fee agreement must be in writing and signed by the client.4Cornell Law School. Contingency Fee It has to explain how the fee percentage is calculated and clearly identify which expenses you’ll be responsible for. Vagueness on those points is a red flag, not a detail to sort out later.
Pay close attention to the scope clause. This section defines exactly which legal tasks the attorney will perform. A standard contingency agreement covers representation through trial and post-trial motions, but many agreements explicitly exclude appeals. If the other side appeals a verdict in your favor, you may need to sign a separate agreement and pay additional fees for appellate work. The same often applies to collecting on a judgment if the defendant doesn’t pay voluntarily. If the agreement doesn’t address appeals or collection, ask before you sign.
Gross Recovery vs. Net Recovery: The Single Biggest Line
Your recovery gets divided into two buckets: the attorney’s fee and the litigation costs. The fee is the attorney’s compensation. Litigation costs are the out-of-pocket expenses your attorney advanced to build the case — court filing fees, deposition transcripts, process server charges, medical record requests, postage, expert witness fees. In a complex case with multiple experts, costs alone can climb into the tens of thousands of dollars.
The single most important line in your agreement is whether the attorney’s percentage comes out of gross recovery or net recovery. The difference can be thousands of dollars.
Suppose your case settles for $100,000 and litigation costs total $20,000. Under the gross method, the attorney takes their one-third ($33,333) off the top. You then pay the $20,000 in costs from what’s left, leaving you with $46,667. Under the net method, the $20,000 in costs comes out first, reducing the pot to $80,000. The attorney takes one-third of that ($26,667), and you keep $53,333. Same settlement, same percentage, and you take home nearly $7,000 more under the net method.
Many firms default to the gross method because it protects their fee from being eroded by high costs. If your agreement doesn’t specify, ask. And if you have the leverage to request the net method, use it. Most clients never think to.
What You Owe If You Lose
If the case produces no recovery, the attorney earns no fee. That part is clear. Litigation costs are a separate question, and the answer depends entirely on your agreement.
Some agreements are truly “no win, no pay” across the board — the firm absorbs both the lost fee and the costs it advanced. Others make you responsible for repaying costs regardless of outcome. Still others split the difference, waiving costs below a certain threshold but requiring reimbursement above it. Read the cost provision carefully. If a firm has spent $15,000 on experts and depositions and you lose at trial, the last thing you want is a surprise bill.
Firing Your Attorney Before the Case Ends
You have the right to fire your contingency attorney at any time, for any reason. Doing so doesn’t mean you walk away free and clear. When a client terminates a contingency agreement before the case resolves, most courts allow the discharged attorney to recover the reasonable value of the work already performed. This is known as a quantum meruit claim, and it typically attaches as a lien against any future settlement or judgment.
The practical effect is that your new lawyer’s fee and your old lawyer’s lien both come out of the same pot. If the first attorney worked your case for a year before you made a switch, their lien could consume a meaningful portion of your recovery. That’s not a reason to stay with a lawyer you’ve lost confidence in. It’s a reason to understand the financial consequences first, and to ask any new attorney how they plan to handle the predecessor’s lien before signing a second agreement.
How the Money Actually Reaches You
Once the opposing side agrees to settle, you don’t get a check the next day. The typical timeline from a signed settlement agreement to money in your hands is one to six weeks, and some cases take longer. Several steps have to happen in order.
Release of Claims
Before the insurance carrier releases payment, you’ll be asked to sign a release. This waives your right to pursue any further legal action against the defendant arising from the same incident. Releases are typically drafted broadly, covering known and unknown claims alike. Once you sign, the case is permanently closed. If you suspect your injuries may worsen or that additional damages exist, discuss this with your attorney before signing. There’s no undoing a release.
The Trust Account
The insurance company or defendant sends a settlement check to your attorney, usually made payable to both you and the firm. Your attorney deposits it into a client trust account, a segregated bank account that keeps your money separate from the firm’s operating funds. Rules of professional conduct require this separation to prevent commingling.1American Bar Association. Rule 1.5 Fees – Comment The funds sit there while the check clears and while your attorney works through disbursement.
The Settlement Statement
Your attorney prepares a settlement statement itemizing every dollar: total recovery, attorney’s fee, each litigation cost, and any third-party liens. You review and sign this document to authorize distribution. Don’t treat it as a formality. Check the math. Verify the fee percentage matches your agreement. Confirm whether costs were deducted before or after the fee was calculated. Once you approve, your attorney issues your check for the remaining balance.
Medical Liens and Insurance Reimbursement
Your settlement check rarely belongs entirely to you and your lawyer. If a health insurer, government program, or medical provider paid for treatment related to your injury, they may have a legal right to be repaid from your settlement. These reimbursement claims get satisfied before you see a dime of your share.
Medicare
If Medicare paid for any treatment connected to your injury, federal law requires that Medicare be repaid from your settlement proceeds. You or your attorney must report the case to Medicare’s Benefits Coordination and Recovery Center as soon as a settlement occurs.5CMS. Medicare’s Recovery Process Medicare issues a conditional payment letter identifying what it believes it’s owed, and you have 30 days to respond. Miss that deadline and Medicare issues a demand letter for the full amount without reduction for attorney fees or costs, with interest accruing immediately.6CMS. Conditional Payment Information Unpaid Medicare liens can be referred to the Department of Justice or the Treasury Department for collection. Not something to ignore.
Private and Employer Health Plans
Many employer-sponsored health plans include subrogation clauses requiring you to reimburse the plan for medical expenses it paid if you later recover from the person who injured you. Plans governed by the federal ERISA statute enforce these rights aggressively. The Supreme Court has held that an ERISA plan can reach identifiable settlement funds in your possession, though if the proceeds have already been spent and can no longer be traced, the plan’s ability to recover becomes far more limited. A good attorney identifies every potential lien early in the case and negotiates reductions where possible. That negotiation directly affects how much you keep.
Taxes on What You Keep
Not all settlement money is taxed the same way, and the rules catch people off guard.
If your settlement compensates you for physical injuries or physical sickness, the entire amount is excluded from your gross income under federal tax law. The exclusion covers compensatory damages, including lost wages, as long as the underlying claim is rooted in a physical injury.7Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness Punitive damages are the exception. Even in a personal injury case, any punitive damages you receive are taxable.8Internal Revenue Service. Tax Implications of Settlements and Judgments
Settlements for claims not based on physical injury — employment discrimination, breach of contract, defamation — are generally taxable as ordinary income. And here contingency fees create a painful result. The Supreme Court ruled in Commissioner v. Banks that when a settlement is taxable income, you must report the full amount, including the portion paid directly to your attorney as a contingency fee.9Justia U.S. Supreme Court Center. Commissioner v. Banks, 543 U.S. 426 (2005) Settle an employment case for $300,000 with the attorney taking $100,000, and you report $300,000 in income despite receiving only $200,000.
Congress softened this for certain claims. If your settlement resolves an unlawful discrimination claim or certain whistleblower actions, you can take an above-the-line deduction for the attorney fees you paid, effectively canceling out the phantom income on the attorney’s share. The deduction doesn’t help with breach-of-contract claims or most other non-physical-injury settlements. If your case involves taxable proceeds, talk to a tax professional before the settlement is finalized. Structuring the allocation correctly can save you a significant amount.