Bold Precautions

Policyholder Advisor & Alert

PUBLISHED ON: August 1, 2007

A recent news article reminded me of a client several years ago that came to Anderson Kill seeking a solution to a problem. The client had recently settled a liability claim against the advice of assigned defense counsel, and without insurance company approval. That the company settled was an extremely aggressive decision. If it was wrong, the consequences meant risking all its insurance coverage for the claim. This news article detailed the growing liability faced by companies facing liabilities similar to those already resolved by our client. Because they did not settle when our client did, their potential loss is exponentially greater, and very likely far exceeds their available insurance coverage. They currently are considering a huge settlement demand in return for immunity from criminal charges and a release from civil liability. Their caution actually increased their exposure.

We take for granted that risk involves both probability and consequences, but this was not always obvious. A single 17th century French intellectual, Blaise Pascal, is responsible both for inventing probability theory as a mathematician, and demonstrating the importance of consequences as a philosopher. The idea known as Pascal’s Wager demonstrates that consequences can be more important than probabilities when assessing risk. In application, the lessons of Pascal’s Wager are often misapplied to advise excessive caution where a bold move can actually limit one’s risk.

As it turned out, we helped our client obtain an insurance payment for the full value of its aggressive settlement, but the decision to settle would have been correct even had we not succeeded. The settlement jeopardized the insurance recovery, but also put a cap on the client’s maximum potential loss. It limited the consequences even though it made the insurance recovery more improbable. This will not always be the case, but it is always important to remember that talking on a new risk can sometimes limit an existing one.

Bonne chance.