Overcoming Obstacles to Intellectual Property Insurance

Who Is Covered and on What Terms?

Traditional insurance works best when the risk is widely spread with uncertainty about its targets. Occasionally, IP fights come from unexpected sources, such as non-practicing entities (NPEs) who assert patents with a seemingly distant relation to the targeted technology. These NPEs, sometimes referred to as patent trolls, can cause surprising disruptions to a practicing company with allegations based on subparts of the accused products. These entities may acquire patents near the end of their 20-year maximum term, pursuing users of what was thought to be generic elements incorporated into their offerings.

Likewise, operating companies from seemingly unrelated technologies sometimes try to monetize their assets by demanding licenses from noncompetitors who happen to fall within the scope of broadly claimed patents. Nearly identical trademarks can coexist in different channels of commerce without conflict until someone perceives a likelihood of confusion. These types of disputes can be easier to insure against because they are generally distributed among industries and suit the insurance model of spreading general risks for modest premiums. Prospective insureds may not perceive the threat, making them less likely to pursue or bind coverage. Insurers and brokers can educate prospects on the value of risk management for potentially expensive but unlikely IP conflicts.

Nonstandard Risks

Competitors often hold IP in order to claim exclusive rights in a market where others may want to sell. Companies may chase trends in industries but come up against patents, trademarks, or trade dress that seem necessary to the products. In these situations, diligent underwriters may assess higher retentions or party exclusions on foreseeable challengers. For example, a developer of a new smartphone operating system may not be able to obtain coverage against patents created or licensed by Apple or Android without a strong showing that the applicant fully designed around those claimed rights. The new system would also need to avoid using names similar to established trademarks or copying existing software code without a license. In those situations, insurance is not a substitute for proper IP practices.

Prior business relationships can trigger or exacerbate IP conflicts. Partners in a project may go their separate ways but dispute who owns the underlying IP rights to related developments. If hard feelings linger after a joint venture concludes, that bad blood can increase both the likelihood and severity of litigation expenses as private grievances are masked in IP claims. Family members whose business interests diverged can be among the most vexatious litigants in any kind of dispute.

Many music groups beyond their initial success have fought trademark battles over who owns the group's name and to what extent former members can use that name when promoting their own shows. Cocreators of copyrighted works may each use the materials but can fight about the remuneration owed to the others for that use.

Under most employment relationships, employers own IP rights in their employees' creations in the scope of their job. Even if they were the ones to innovate, a former employee's later use of the innovation may trigger infringement claims by the former employer. Conversely, unless agreed elsewhere in a contract, writers, photographers, or videographers have ownership of the copyright in their works of authorship and can sue former employers for continued use beyond the initial purpose.

Applicants for IP coverage may be asked about recent corporate events such as executed or refused mergers, acquisitions, and licenses. Insurers may set special terms on parties who have a prior relationship and reason to complain about IP matters. Underwriters may be persuaded to cover more apparent risks if applicants distinguish their activities from prior art. However, even formal freedom to operate opinions from outside attorneys may not support an offer of coverage if the dispute remains too likely to occur and too expensive to litigate. Such opinions predict the ultimate outcome of a case and not the chances and costs of needing to persuade a court. However, this diligence can help underwriters get more comfortable with a risk if they provide clear pathways to defending assertions of infringement.

Brokers and internal risk managers may need to manage expectations that some risks may have different scopes of coverage available in the risk appetite of insurers. Creative solutions may be collaboratively insured by treating business risk differently from insurable risk, where nonstandard threats may be carved out or have different terms for coverage.

The Need for Open Communication

Applicants and underwriters for IP insurance benefit from the opportunity to explain any special circumstances and consider terms for nonstandard risks. Simply providing a company name and website address may not give a potential insurer the comfort of seeing only standard risks and offering clean terms. The applicant may have already managed a perceived risk or be lacking a required element of some core patent claims held by the market leader. When underwriters have questions, improved terms may be available after a phone call with a knowledgeable employee of the party seeking coverage. Without an open channel to communicate, coverage offerings may be limited by adverse assumptions made by the underwriter.

Applicants for IP insurance should resist the temptation to withhold potentially problematic information. Undisclosed details about known threats are likely to come up in any potential litigation, potentially endangering all coverage for the matter. Enforcement coverage for IP assets often excludes coverage against pre-existing infringers. In litigation, one of the first questions in discovery is likely "When did you begin offering this product or service?" If the answer to that predates the coverage, coverage may cease after the insured is already in the litigation. Similarly, defense coverage that excludes pre-existing threats may be endangered when a plaintiff pleads willful infringement after sending a cease-and-desist letter that was not subsequently disclosed in an application for IP defense coverage.

Educating Prospective Insureds

The biggest obstacle to the adoption of IP insurance coverage remains the lack of awareness of its availability and benefits, especially for companies with standard risk profiles. Insurers and managing general agents may offer resources to educate potential insureds, such as websites, marketing collateral, videos, and webinars. The broker community can further help spread the word by including IP in discussions of available coverages and by obtaining applications for underwriters to offer terms.

Pricing objections may be addressed by comparing the cost of these conflicts with the amount of premiums. As more insurers have entered the IP market, pricing for standard risks has generally been driven downward, and companies with standard risks should feel more comfortable binding this type of coverage. Insurers with more commoditized pricing may have less appetite to address nonstandard situations and decline to offer coverage to certain categories of applicants or risks. Other programs may take the time and effort to understand the nuances of challenging circumstances and collaborate on special terms to transfer an appropriate level of the risk. These are the situations that especially require open channels of communication between applicants and underwriters.

Recognize Potential IP Insurance Opportunities

IP matters to all types of businesses. The reputation of small and large companies is recognized by their branding and identifying features, which are protected by trademarks. Content creation and deployment are controlled by copyright law, including software code. Technological advances and usage implicate patent rights, which can be asserted against anyone who makes, uses, sells, offers for sale, or imports any product or process.

Managing the risks of IP conflict through insurance makes sense for entities of all sizes and industries. Proactive IP coverage can avoid later concerns that litigation could have been covered before it erupted but may not be insurable once a fight has been initiated. From the most complicated technologies of manufacturing, artificial intelligence, wireless communication, and life sciences to seemingly simple categories like sporting goods and business services, patents, trademarks, copyrights, and trade secrets can hold the key to commercial success. IP insurance can provide the resources necessary to obtain the best possible outcome from claims of infringement.