Why do lawyers charge interest? How to protect yourself against high interest rates

The rate of interest a lawyer charges on the money he or she spends on behalf of a client (called “disbursements”) should definitely be a consideration when an injured person hires a lawyer since the rate varies greatly between law firms.

Most good injury lawyers will pay all the expenses of fighting a case. This amount can be huge for a person with permanent disabling injuries ($50 to $100,000 or more). This is mainly because top medical specialists charge $600 to $800 per hour for their assessments, reports & court attendances for legal purposes. Lawyers vary greatly in their willingness and ability to fund the cost of top-notch medical and other experts. Much, or sometime all, of these expenses may be recoverable from ICBC if the injured person is successful in his or her claim for damages.
Many good injury lawyers will also fund the cost of treatment that is recommended to their clients but is not covered by an insurer.
Most lawyers charge interest on all litigation and treatment expenses they spend on behalf of their clients.
There is a great variation in the rates of interest that lawyers charge on the outstanding balance over time  of their disbursements:
  • many lawyers charge very high rates of interest  such as 14% to 24% per annum,
  • some lawyers charge lower rates of interest of about 6 to 12% per annum and
  • a very few lawyers charge no interest at all.
Interest on the expenses a lawyer incurs can become a very large cost to a client. For examples, 18% interest on $20,000 is $3,600 per year and 20% on $40,000 is $8,000 per year.
Therefore it is important that clients either:
  • negotiate before signing a fee agreement for what they consider a reasonable rate of interest on their lawyer’s disbursements compared to their bank’s prime rate or
  • find a good lawyer in whom they have confidence who charges little or no interest.
The true cost of interest on disbursements is somewhat hidden because clients do not generally know:
  • how much their lawyer is spending on experts over time and
  • how much the total ongoing interest charges are on those expenses, unless the client specifically asks,

until the lawyer’s final accounting letter after settlement or court award. This letter sets out:

  • the client’s final settlement or court award
  • less each expense the lawyer incurred to fight the case
  • interest owing on those expenses and
  • finally, a net amount that is payable to the client.