Contingent fees versus legal expenses insurance

Abstract

We model a civil dispute as a contest with delegation. We first study the American practice of contingent fees, in which case a plaintiff’s lawyer works on a contingent-fee basis, but a defendant’s lawyer on an hourly-fee basis. Next, we study the European practice with legal expenses insurance, in which case the defendant may have to purchase a legal expenses insurance policy and both lawyers work on an hourly-fee basis. Comparing the American and the European practice, we show: (i) the plaintiff may prefer the European one to the American one; (ii) the European one may incur more legal expenses than the American one. These findings shed light on the Japanese and Korean jurisdictions that have to introduce an institution to support credit-constrained plaintiffs.