Contingent Liability

All right. You know what a liability is. It’s a debt. It’s a promise you’ve made that you need to fulfill. And fulfilling it can be done with cash…or a promise of delivering inventory. Or, after you’ve sold a home to the Joneses...an interesting family with oddly large foreheads...uh, delivering good title to the home.

So what’s a contingent liability?

Well, think of it as a call option or a put option on a security. A contingent liability is a derivative of some other, underlying thing. The most common contingent liability would be a filed lawsuit that is more than just an ambulance-chasing securities lawyer hoping to get a quick 500 grand to go away.

Google might be willing to pay 3 billion dollars to buy Ring, that wireless doorbell company…contingent upon Ring properly defending its lawsuit from Honeywell, which claimed that they own the patents on the process. The financial outcome of that lawsuit is a contingent liability.

And the outcome of the Joneses moving into town…is worldwide dominance and the enslavement of all humankind.

But, uh...at least they keep their front lawn looking nice.