What Do We Mean By Risk?
As a mediator, part of my job is to help lawyers, litigants, and carriers appreciate the various risks they face in any given case. For me simply to pronounce a given claim or defense as “risky” is of little help to anyone - and any self-respecting trial attorney will likely brush such pronouncements aside. Trial lawyers - whether they are representing a plaintiff or a defendant - are advocates. They accept and deal with risk if that is what their clients and/or carriers want or the circumstances otherwise require. Appreciating risk involves more than simply declaring it exists.
This is important for lawyers because they are counselors as well as advocates. In that capacity they have the added responsibility of explaining the risks of trial to their clients and carriers so they in turn can make informed decisions on how they want to proceed: go to trial or negotiate in an effort to settle? It is only after people go through a genuine appreciation of their risks when they can make these informed decisions on how to proceed.
That risk appreciation process starts with two basic questions. First, what do we mean by risk? Second, what are the risks? In this post, I address the first of these. Litigants unfamiliar with judicial procedure and trials sometimes struggle to understand what we mean by risk. Afterall, why would justice involve risk? If we can explain these risks to them, however, we can help them to understand the predicament they are in and why a settlement may be a better option than a trial.
So . . . what do we mean by “risk”?
When we talk about risk, we are in fact talking about two things: (1) the probability of something happening, and (2) the consequences if it does happen.
Formulaically, Risk = Probability x Consequences.
Much can be said on this topic, but for now let us consider a very simple example and ask these two basic questions.
What is the probability a plaintiff will prevail on the issue of liability in a case involving clear, catastrophic, and life-changing injuries?
Options: Extremely Low - Very Low - Low - Medium - High - Very High - Extremely High?
What are the consequences if the plaintiff does prevail on the issue of liability?
Options: Assume for this example the plaintiff’s damages are indisputably large.
If the answer to question 1 - the probability the plaintiff will prevail on liability - is Extremely Low, risk for the defendant will be minimal even though the consequences of a liability verdict would be a large damages award. Conversely, the risk for the plaintiff would be substantial; if the plaintiff loses on liability, the consequence is he recovers nothing.
If the answer to question 1 is Extremely High, however, the defendant faces a substantial risk of a large damages award, and now it is the plaintiff who has the minimal risk.
If the answer to question 1 gravitates toward the Medium zone, the parties enter that gray area where each side faces comparable risk.
This risk dynamic, based on shifting weights in probabilities and consequences, is well-known to lawyers and insurance professionals who work in this field. It is not always obvious to litigants, however, and they need to understand this dynamic in order to make informed decisions on how to proceed with their dispute.
Also, while the formula itself is simple, the real challenge is in assessing what values to apply to each question regarding probability and consequence. That is a challenge everyone must grapple with, be they lawyer, client, or carrier.
The real beauty of mediation is it gives everyone the opportunity to take a time-out and to go through this risk appreciation process. One of my roles as a mediator is to help people with this. It is not enough for me to declare something is “risky”. I need to coax people through the probabilities and consequences that define the risks within their particular case.
Only then can they make their own informed decisions.
Only then can they truly manage their risk.
