Canadian Underwriter
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Taking Care of Business


November 1, 2011   by Robert Fletcher, President, Intellectual Property Insurance Services Corporation (IPISC)


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Robert Fletcher

Many companies are simply unaware that the insurance they routinely purchase excludes coverage for their valuable intellectual property (IP) assets, especially patents. These assets often make up 80% of a company’s value and are protected by intellectual property rights. These rights are found in the form of patents, trademarks, copyrights and trade secrets, as well as in the making, using, selling, offering for sale or importing of a product or service. The tremendous value of these assets alone warrants the necessity of specialized IP insurance products. Intellectual property insurance must be a critical part of any company’s risk management plan. The inability to protect IP through funding the high cost of litigation is a leading cause of failure for companies.

Companies are either purposely or inadvertently self-insuring their IP risks. Companies can no longer afford to ignore the importance of insuring this asset, which gives them a competitive advantage. Companies that are successful or have innovative IP are more likely to be involved, either offensively or defensively, in an IP lawsuit. Specialized IP insurance policies are the only risk transfer tool available to make sure money is available for funding the high cost of litigation. According to the American Intellectual Property Law Association’s most recent survey, the average litigation expense incurred by each side – plaintiff and defendant – through a patent trial is $2.8 million, assuming the amount in controversy is between $1 million and $25 million. This number does not even include damages, which could easily reach several millions of dollars.

Without specific IP insurance in place, companies are often left with no real alternatives to cover the cost of litigation. Weak alternatives include:

Commercial General Liability (CGL)  Policy Coverage

CGL policies do not offer any meaningful IP coverage, since these policies are completely devoid of any IP enforcement coverage. The limited defensive coverage offered to an insured under a CGL policy is found in the “Advertising Injury” section of the policy, but it is limited in scope. The alleged infringement must be a direct result of the actual advertising itself.

Professional Liability Policies

These policies are designed to cover defects in design and performance, thus leaving a very narrow opportunity for an insured to secure defensive coverage for IP infringement.

Companies’ Credit and Working Capital Reserves

Given litigation costs and damages reported in the millions of dollars, many start-up companies find it impossible to adequately fund IP litigation. Thus, it is wise for companies to evaluate their borrowing capacity and their investor’s appetite to contribute to litigation.

The only alternative may be accessing working capital reserves. Obtaining insurance specific to this exposure leaves working capital available for growing and capturing market share and maintaining profitability. Therefore, if a company finds itself in court as a plaintiff or a defendant, funds are available to thoroughly and vigorously litigate.

Companies without IP insurance may be forced into litigation with larger competitors that have plentiful resources to litigate, leaving companies with the following alternatives to
insurance:

  • abandon the products or IP rights.
  • attempt to enter into a license agreement from a weaker financial position.
  • sue the alleged infringer, or be sued by the IP owner, possibly depleting any available cash reserves in legal costs.
  • incur a burdensome royalty payment.
  • Be forced to settle due to lack of funds to litigate, instead of fighting the case on the merits.

Consider instead the following IP insurance policies available to help manage a company’s IP risk:

Defence Insurance

Defence insurance reimburses the litigation expenses to defend against charges of infringing another’s IP rights by the products or services being sold. It might be purchased to cover potential damages or settlements as well.

Enforcement Insurance

Enforcement insurance is a unique plaintiff’s policy that reimburses the litigation expenses to enforce IP against alleged infringers.

Unauthorized Disclosure Insurance

Unauthorized Disclosure insurance reimburses the litigation expenses to defend against charges of the unauthorized or unintentional disclosure of a third party’s entrusted confidential information.

Multi-Peril Insurance

Multi-peril is first-party coverage for a decrease in value of the insured’s assets resulting from losing IP litigation. It reimburses money directly to the policyholder beyond the legal costs and damages (awards) of the underlying case.

Jim Francis, a seasoned IP litigator with Francis Law PLLC in Lexington, Kentucky, recognizes the benefits of holding an IP insurance policy. “No matter how valid a client’s position or how skilled the attorney, the success of any disputed matter is necessarily dependent upon the client’s willingness and ability to pay for the cost of adequately preparing and positioning their case for a favorable resolution,” Francis says. “When a case is built on a strong foundation, risk is minimized and the matter becomes more likely to be resolved early, favourably and in a manner that is less adversarial. Given the current economic climate, small and mid-sized companies are understandably more reluctant than ever to litigate and more willing to accept infringement as simply part of the cost of doing business.”

When companies are forced into litigation, their very survival is often at stake, Francis further observes. The lack of a war chest for funding litigation can force companies to minimize litigation costs to the point that preparation is undermined and the company is forced to negotiate from a point of weakness rather than strength.

“When there is a significant difference in the size of adverse parties, stronger litigants often depend on outspending their smaller adversaries in an effort to force a resolution that favours the party with the deeper pockets,” Francis says. “This is where I have found IP insurance to be an invaluable asset for any IP client. Insurance coverage can even the playing field and afford smaller litigants the opportunity to defend their intellectual property rights and force a more favorable resolution than would otherwise be possible against a larger adversary.”

Conclusion

Surprisingly, despite the established availability of IP insurance policies, most business owners have not been made aware of their existence. Equally surprising is the number of business owners who think they are covered for IP risk under their GL policy. Companies can no longer afford to ignore the importance of insuring this asset. It is important to discuss IP insurance with an insurance professional who is knowledgeable about intellectual property insurance.