If you're in a situation where you have a choice between dodging HP damage and dodging Sanity damage, take the health damage.
Getting the shit beat out of you can be fixed just by getting the wounded guy back to town alive, even if he was on Death's Door when you left.
Going insane costs money to fix, and can potentially cripple your best heroes in the process. Besides, disaster dominoes are a thing here- if one guy goes nuts mid-fight, chances are he'll start stressing out everyone else in the process, leading to someone else going mad, leading to more stress, eventually leading to a small ceremonial urn and a quiet funeral.