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Ehud Kamar provides an in-depth analysis of a specific aspect of the divergence between social and private incentives to bring suit,' a topic that has been explored more generally by Steven Shavell.2 Shareholder suits provide two social benefits: they deter wealth-destroying managerial behavior and clarify legal duties by creating precedents. Kamar argues that in order to provide plaintiffs sufficient incentive to bring suit, we may have to set damages at a level so high that risk-averse managers will become too timid to manage effectively. Conversely, if we set damages low enough to make it feasible for managers to operate in a world of legal uncertainty, we may give shareholders insufficient incentives to bring socially valuable suits. Kamar argues that when corporations purchase director and officer liability insurance, they decouple the award to the shareholder/plaintiff and the damages paid by the manager/defendant in a way that better aligns private and social incentives. Insurance acts as a private subsidy to litigation, in the sense that shareholders deliberately incur costs to encourage suits that will ultimately produce better managerial decisions. Adhering to the commentator's traditional role as devil's advocate, I will express some skepticism that the encouragement of litigation to reduce legal uncertainty is an important function of insurance and indemnification in the corporate context. That insurance is prompted by legal uncertainty, I think, is clear. Whether insurance helps produce a more nearly optimal level of litigation is a much more complex question and, I will argue, one we lack sufflcient facts to answer. As a positive account of why insurance exists, I am inclined to credit the simple view that managers want to reduce the risk of undeserved liability and shareholders want a third party to monitor management.

The First Thing We Do, Let's Pay All the Lawyers