A company’s Intellectual Property (IP) is often its most crucial corporate asset – the one that it must aggressively protect. In recent years, the global importance of Intellectual Property Rights (IPRs) and their related expenses – lawsuits revolving around IP Infringement – have increased significantly. As a result, the benefits of IP insurance are gaining more attention. It is vital to safeguard the patents, trademarks, copyright, and other forms of IP that make a business competitive and successful, and IP insurance is a step towards the same.
Today, the risk of high litigation costs related to IP Protection can cause a deep financial impact to companies, sometimes even leading to bankruptcy. Surveys conducted by the World Intellectual Property Organization (WIPO) estimate that the average cost of IP litigation in the US courts is about USD 4 million, while litigation in other countries can easily go up to tens of thousands of dollars. Many innovators and companies have turned to IP insurance to distribute their costs and increase their competitive advantage.
What is IP Insurance?
IP insurance is a liability policy; its essential purpose is to protect the insured against legal fees, damages, and expenses incurred in a judicial proceeding relating to IP. It can also help companies defend themselves against claims of IP infringement or theft of IP and/or contractual indemnities. Furthermore, it can also assist in pursuing parties who infringe upon a company’s IP. As every risk is different and every insured’s requirements are different, coverage can be tailored to suit the insured’s needs. Terms are built from the ground up based on what the insured requires from the coverage and what the markets are willing to insure. This could include:
- All IP or just patent only;
- All products and services of the insured or only a handful of specified products;
- All of their contractual agreements or only one specified contract;
- Defense against IP infringement claims; or
- Loss of future profit.
Types of IP Insurance
IP insurance can be of different kinds, based on the purpose for which it is required. Broadly, it can be categorized into the following:
- Abatement or Offense-Based Insurance – This type of insurance protects your patents, trademarks, copyright, trade secrets, and innovations from predatory companies. It is a unique plaintiff-centric policy, which reimburses litigation expenses, with no repayment required if you lose a lawsuit. It mainly extends to policyholders for enforcing their IPRs against potential infringers. These policies also provide reimbursement for the use of expert witnesses as well as other costs incurred in proving infringement. Coverage is provided on a ‘claims-made’ basis, which requires that the infringing conduct takes place during the policy period. To establish coverage, policyholders must typically obtain a legal opinion stating that they hold the rights to the IP.
- Defense Insurance – General insurance does not always cover IP risks outside of advertising injuries. Defense insurance bridges the gap to protect a company against IP claims – frivolous or not. This kind of insurance reimburses defense costs incurred by a policyholder in infringement litigation and is commonly known as ‘defense cost and damages reimbursement’ insurance. In addition, it enables policyholders to assert claims of invalidity against a complainant, funds research to re-examine the validity of the policyholder’s IPRs, and may pay for any damages awarded against a policyholder. Coverage is provided on a ‘claims-made’ basis, which necessitates that a lawsuit must be filed during the period in which the policy is effective. Coverage under these policies is typically excluded for willful acts of infringement. Notably, these policies are defensive in nature and provide no coverage to policyholders in enforcing their IPRs against an infringing party.
- Multi-Peril Coverage – This type of coverage is for certain additional costs incurred as a result of infringement claims against a policyholder. Known as ‘multi-peril’ policies, these insure against losses sustained from liability for infringement of another’s IP. The same could include business interruption, loss of commercial advantage, loss of trade secret advantage, cost of redesign, remediation, and reparations that may result from litigation.
- Troll Defense Insurance – Patent trolls or patent assertion entities exist to sue companies for using their non-core products. The majority of patent lawsuits are filed by trolls targeting small businesses and start-ups. Troll defense insurance is a company’s best defense against these costly demands.
Advantages of IP Insurance
IP insurance can be predominantly valuable to a small technology company having an asset base consisting largely or entirely of a small IP portfolio. Faced with an unabashed infringer, a small company has the option of either allowing the competitor to infringe, thereby risking its only assets, or filing a suit at its own expense, thereby endangering its financial stability. Insurance provides the small technology company with a way to protect its rights and financial stability. Similarly, for the new competitor trying to break into a market in which aggressively enforced IPRs are the rule rather than the exception, the right level of insurance protection can mean the difference between survival and death.
IP insurance also serves as a safeguard to protect the cash flow. Irrespective of the challenges faced or threats in the industry, IP insurance serves as monetary security in the form of compensation from the insurance policy, which ensures uninterrupted cash flow.
IP insurance can also act as a safeguard while negotiating any deal or technology transfer. It acts in increasing the reliability score of the parties involved in the process by acting as an escrow to the transaction.
IP insurance also enables one’s IP to be used as collateral. Insurance facilitates and improves the value of mortgaging or seeking a loan against the same property as a guarantee. Being considered as collateral undoubtedly improves the significance of the company and speaks about the credibility of the business.
Any company that designs, manufactures, sells, or supplies a product may unintentionally infringe on third-party IPRs and suffer liability. Even if the company is only supplying a product that has been designed and/or manufactured by a third party, it can still attract liability for contributory infringement. Similarly, theft or loss of an IP can’t be foreseen and often causes a huge impact on the finances of a business. All of this, coupled with the spiraling costs of IP litigation, has prompted several companies to turn towards IP insurance. For mitigating the possible impact on a business, it is imperative to prepare yourself. It also means that a company will have to understand the kind of IP assets it holds, ensure that these IP assets are registered (since registration is often a precondition for insurance), and use written agreements to protect its IP further. The same will ensure that the company’s tracks are covered while applying for an IP insurance claim. Overall, insurance provides a significant advantage in managing risks and remaining competitive in the market and is increasingly gaining more and more popularity.