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Plaintiff lawyer’s incentive to settle cases
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This book was written by Michael Dew, a Vancouver lawyer who practices civil litigation, includng assisting persons who have been denied insurance coverage by insurance companies, and persons dealing with builders lien issues.
The first thought that frequently comes to mind when considering a contingency fee agreement is that it must be good for the client because the more that is recovered on the claim the more the lawyer gets paid, so that must be maximum incentive for the lawyer to work hard, right? Wrong! Because it generally takes far more effort to advance a claim through the later stages of litigation (particularly trial), lawyers being paid a set percentage have a financial incentive to settle the claim (at a slight discount to full value) without proceeding through the work intensive latter stages of the claim.
Consider a claim that the plaintiff's lawyer objectively believes is worth $100, but that shortly before trial the defendant is only prepared to pay $80 to settle. If the case goes to trial and $100 is awarded, assuming a 30% contingency fee, the plaintiff will receive $70 and the plaintiff’s lawyer will receive $30. If the claim settles for $80 before trial, the plaintiff will receive $56 and the plaintiff’s lawyer will receive $24. Both the plaintiff and the plaintiff’s lawyer will receive 20% less, but the plaintiff’s lawyer will have time (since he or she is not busy preparing for and attending trial) to work on and settle another two (at least!?) similar cases in the time that would have been spent on the trial for the first case. Assuming all three files settle for $80 without going to trial, the total payment the plaintiff’s lawyer receives is 3 x $24 = $72, rather than just the $30 if the first case was taken all the way through trial. This demonstrates the substantial incentive on the plaintiff’s lawyer to settle as many cases as possible as quickly as possible (even if below their “fair” value) rather than taking cases to trial. The above analysis is summarized in the table below:
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Case #1 proceeds through trial and plaintiff is awarded the “fair value” of the case i.e. $100
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Case #1 settles for $80, and in the time that would have been spent on the trial of Case #1, the plaintiff’s lawyer works on and settles 4 more similar cases for $80 each.
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Fee earned on Case #1 (30%)
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$30
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$24
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Fee earned on Case #2 (30%)
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$0 (busy running trial for Case #1 and so no time to work on this case).
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$24
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Fee earned on Case #3 (30%)
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$0 (busy running trial for Case #1 and so no time to work on this case).
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$24
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Total fees earned
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$30
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$72
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The above calculation assumes that proceeding through trial is substantially more work than merely preparing a case for settlement, but that is almost universally the case. It is theoretically possible that the plaintiff’s lawyer might be so thorough in preparing the case for settlement negotiations that all witnesses have been prepared, opening and closing arguments have been drafted, and the bulk of the trial preparation work has been done, but that is seldom the case in reality.
Another factor that may deter the plaintiff’s lawyer from proceeding to trial is the stress and effort associated with trial. While some lawyers find trials exhilarating, many find them overwhelming and exceedingly stressful. Reluctance to endure the stress and time commitment required to properly run a trial may deter the plaintiff’s lawyer from proceeding through trial.
On the other hand, a factor which may act as an incentive to proceed to trial is the plaintiff’s lawyer wanting to send a message to the opposition regarding the willingness of the plaintiff’s lawyer to proceed to trial generally. In other words, lawyers who frequently advance claims to be paid by the same defendants (e.g. a large insurance company) may have a personal incentive to proceed to trial in a particular case to send a message that the lawyer is willing to go to trial and that the defendants should not try and short change the lawyer’s clients on future claims because the lawyer will go to trial if necessary. A lawyer may have an incentive to take a particular case to trail partly to send a message to the defendant’s insurer rather than just to secure extra compensation for the particular plaintiff.
It is not being said that lawyers will necessary consciously act in accordance with the incentives discussed on this page, but it is considered worthwhile to understand some of the incentives that might be in play. Further, plaintiffs should not take the above to mean that it is always a good idea to take claims to trial, and it is important to keep in mind other factors relevant to advancing a case through trial:
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The above analysis refers to a “fair value” for the client’s case, but in many cases it is difficult, or even impossible, to determine exactly what the “fair value” of the case may be. Assessment of damages in some cases is somewhat subjective and the final outcome may difficult to predict. Actual outcomes can also depend on factors such as which judge or jury hears the case.
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Proceeding to trial can be stressful for the plaintiff, sometimes involves private and personal information being disclosed in a public setting, and may result in the court making derogatory comments about the plaintiff e.g. the court may find the plaintiff to have been untruthful when giving evidence. Some plaintiff’s may wish to avoid such comments being made about them in a court judgment that may be publicly available on the internet.
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Generally the consequences of a bad result at trial is more harmful to the plaintiff than to the plaintiff’s lawyer because the unpredictability of trial results will average out over time for the plaintiff’s lawyer (the good awards will balance out the bad), but most plaintiffs only “play the game” once and will not have an opportunity for a later good result to cancel out an earlier bad result.
In summary, while on first impression a contingency fee agreement may appear to give the lawyer full incentive to maximize the recovery to the plaintiff, the effort typically required to advance a claim through the latter stages of litigation creates a disincentive to proceed to trial and it is generally in the financial best interests of plaintiff lawyers being paid on contingency to settle as many files as possible as quickly as possible, even if doing so requires setting each case at less than its “fair” value. Again, it is not being said that particular lawyers will act in accordance with these incentives, but the message is simply that plaintiffs should be aware of the economic incentive for lawyers being paid a percentage fee to settle claims without going to trial, even if that requires settling claims for less than they are worth.
