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Purchasing litigation insurance

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A real estate development company is considering purchasing litigation insurance against the risk of being sued over an office building it is constructing. A large lawsuit could drive the company into bankruptcy. The company is publicly traded and is planning to increase its leverage by issuing new debt and buying back shares soon. The CFO is against purchasing insurance. She says, "The risk of being sued is completely idiosyncratic, and we are a publicly-traded company, which means that our shareholders are not worried about idiosyncratic risk. Therefore, insuring against idiosyncratic risks is redundant." Assume here that the company will incur bankruptcy costs if it defaults on its debt. Do you agree with the CFO? Please explain.

Reference no: EM133061380

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