There are three types of lawyers as far as how they make money.

First, there is the hourly lawyer who charges by the hour for his legal services. Hourly lawyers include corporate lawyers, business lawyers and divorce lawyers. Hourly lawyers are paid regardless of whether they win or lose. For significant cases the hourly lawyer   may ask the client to pay a retainer. Bills are sent on a monthly basis and payment is expected on a monthly basis. Any cost for the case is paid  by the client at the the time the cost is incurred. The hourly lawyer is paid win or lose. 

Second, there is the flat fee lawyer. This lawyer charges an agreed upon advance fee for his services. The criminal lawyer is usually a flat fee lawyer-at least for the initial fee. This is because the criminal lawyer  is better able to predict in advance how much lawyer time will be involved in the case. Also, one charged with a crime is often going to be more difficult to collect fees from, and a flat advance fee eliminates this problem. Flat fee lawyers are paid regardless or whether they win or lose. Costs are paid by the client as they are incurred.

Third there is the contingent fee lawyer. The contingent fee lawyer charges no fees unless he wins the case.  His fee is contingent on getting the client a recovery. If he collects nothing for the client he is paid nothing by the client. Personal injury lawyers are usually contingent fee lawyers. The amount of the contingent fee varies. Typically it is one third lawyer / two thirds client. In difficult cases such as medical malpractice cases the contingent fee is often forty per cent lawyer / sixty per cent client. Unlike the hourly and the flat fee lawyers the personal injury contingent fee lawyer may advance the cost of the case.  The client gets the lawyer without paying any money until the case is over.

Why Personal Injury Cases are Generally Contingent Fee Cases

Business clients use lawyers as a cost of doing business thus payment of the lawyer is a business expense. Also cases that an hourly lawyer handles often do not involve a monetary recovery so there is no basis for a contingent fee. Nor is there a recovery in a criminal case.

A personal injury client has an injury that he or she did not expect to have to deal with. They usually do not have money set aside to pay a lawyer. Rather they have a personal injury case that has value if the personal injury lawyer is able to negotiate a settlement with the insurance  company or demonstrate the case’s value to a jury, a judge, or an arbitrator.

In a personal injury case the injured client and the personal injury lawyer form a team. They work together to demonstrate case value. The injured client does what he must do to address his injuries- seek medical treatment to dig out of his injuries. The lawyer deals with the insurance companies on behalf of his client thus earning his ultimate contingent fee and freeing the client to concentrate on his injuries rather then insurance hassles.

To demonstrate case value the personal injury lawyer must be able to take the client’s case to trial. The lawyer must be able to tell his client’s story in a compelling way so a jury sees the significance of the injury. The insurance company will not pay fair value for the case unless the injured plaintiff is honest, impacted from his injury, and can demonstrate his story with and through his lawyer. Even then then fair value may only be able to be obtained from a jury.

In the next few posts we discuss how personal injury law and insurance companies relate. We begin by discussing insurance companies.

How an Insurance Companies Makes Money

An insurance company makes money two ways. First they collect insurance premiums from their insurance customers in exchange for insuring their customers from agreed upon risks-the risks set forth in the insurance policy. Insurance companies price their premiums based on their actuarial  projection of the likelihood of having to pay  for an insured event. In an ideal insurance world the amount of total premiums exceeds the total amount of pay out on insured events and  claims overhead. This means the insurance company makes money from the sale of insurance.

The second way an insurance company makes money is from the investment of insurance premiums that are held in reserve until claims must be paid. This is often called “the float.” Since premiums are collected and claims have yet to occur an insurance company is allowed to invest a portion of its premiums. This is done in the stock market and also in the sale of insurance products like annuities.  If the insurance company is making money from collecting more then it pays that profit is also invested.

Personal Injury Claims

Understanding how insurance companies make money is important to understanding how insurance companies handle personal injury claims. In economic good times when the stock market is doing well insurance companies do well on their investment of premiums. In fact they make most of their money in economic good times. In economic good times they tend to charge less for insurance premiums because they can use the increase in collected premiums to make money at a greater rate then they ever make from the difference between collected premiums and pay outs.

Economic hard times change insurance company dynamics. Since insurance companies are not making much on their investments they must concentrate on the sale of insurance side of the profit equation. This means they tend to charge more for insurance, and they become more difficult as far as paying claims. In tough economic times they deny claims at a higher rate, they offer less to settle claims, and they delay in paying claims.

All of these realities translate to the need for a personal injury lawyer when dealing with an insurance company-particularly in economic hard times.