Clearly number two but you're setting up a false dichotomy. Yes, there would obviously be more attorney profit in the second situation but those aren't the only two situations. Moreover, clear cases of liability rarely progress far, and when they settle outside of trial attorneys don't take sqq. Besides, clients are not required to use a contingent fee arrangement. Insurer costs are largely tied up in defense attorney costs (which they negotiate to absurdly low rates in most cases). No system is perfect but what some advocate would create a harsh injustice to those most deserving or most wronged.