As a rule of thumb I'd say that if there's a chance of a player character dying - or any really serious loss - there should be an extended contest.
Of course, there are ways around it. Have a lesser effect for losses - in the example given of fighting trollkin the "permanent effect" for a complete loss might be a scar or permanent damage to the character's reputation as the story gets around. Or if only a few characters abilities are low enough to get a complete defeat you could let the players set the terms of the individual contests differently - a less formal version of AP wagering. The better fighters could try to overwhelm their opponents quickly - so their contest has serious effects win or lose, while those with lower combat abilities fight defensively and so risk less but are not likely to do more than hold their opponent at bay.
-- -- "The T'ang emperors were strong believers in the pills of immortality. More emperors died of poisoning from ingesting minerals in the T'ang than in any other dynasty" - Eva Wong _The Shambhala Guide to Taoism_ Paul K.
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