The Hidden Cost of a No Fee Guarantee

No doubt you have seen ads by lawyers offering a no-fee guarantee. The notion that something is free can be very enticing. We’ve all experienced it at a grocery store. Products we might not have cared about, like crackers, suddenly become attractive when a small sample is offered for free.

According to Behavioural Economist Dan Ariele in his book Predictably Irrational, he reveals that free is confusing. In an experiment Prof. Ariele ran with Prof. Nina Mazar of the University of Toronto, they first sold Lindt truffles for 15 cents and Hershey’s Kisses for 1 cent. Seventy-three percent of people chose the truffle over the Kiss. In the second part of the experiment, they reduced the price of each chocolate by once cent: So the truffle was 14 cents and the Kiss was free.

This should not have affected the results, but what happened? A complete reversal: The Kiss became the favourite, with sixty-nine percent of people choosing it over the truffle. Why? Prof. Ariele explains that most transactions have an upside and a downside, but when something is free, we forget the downside and perceive it as being immensely more valuable than it really is. Prof. Ariele presumes this phenomenon occurs because people are intrinsically afraid of loss, and when something is free there’s no possibility of loss.

So what about the no-fee guarantees that personal injury lawyers mention in their ads? They need a bit of explaining. The phrases “no fee guarantee,” or “no-win-no-fee,” or “we don’t get paid unless you win” mean that if your lawyer loses a trial, then you won’t be billed for his or her fees, and maybe even expenses. First off, these commitments are typical. So while they have a value, they are not particularly unique to only a few lawyers. In addition, the phrasing of no-win-no-fee guarantees should not be misconstrued as the injured person not having a downside.

The prospective client does have a downside, a big one. If a case proceeds to trial and the injured person’s claim is unsuccessful, then, although the injured person’s lawyer will not charge a fee for having lost a trial, the injured person will typically be responsible for a hefty part of the legal bill amassed by the persons he sued. If a trial proceeds, it is because that person really believes his or her life has been changed by an accident. Trials are about justice, and competing theories based on evidence; they’re not lotteries without downsides. So how much value do no-fee guarantees really have? It depends on the lawyer. If a lawyer never goes to trial, has no intention of taking a case to trial, and always, always settles, then the no-win-no-fee guarantee is rather worthless. The circumstances that might trigger the guarantee never come to pass.

The larger problem with a lawyer who never goes to trial is the insurer knows it too. An insurance company’s offer to settle is based on its prediction of what a judge or jury may award if the case were to go to trial. If the insurance company doesn’t believe the lawyer will take the case to trial, why make an offer reflective of a risk that won’t likely come to pass? They won’t. Meanwhile, if a lawyer does have a reputation for going to trial and prepares your case on the assumption that it will, and perhaps settle along the way, then the guarantee becomes of real value. Accordingly, it is doubly important when choosing a lawyer to select one who has demonstrated sound judgment and skill in the courtroom, by asking about his or her trial record. You don’t want to find out the hard way the hidden cost of “free.”

NOTE: The article has also been featured at www.yorkregion.com