Intellectual Property Coverage: Everything You Need to Know
Intellectual property coverage is an insurance policy that protects the value of your business's intellectual property (IP), including patents and trademarks. 3 min read
2. IP Coverage Under CGL Policies
3. Types of IP Insurance Policies
4. Risks of Eschewing IP Coverage
Intellectual property coverage is an insurance policy that protects the value of your business's intellectual property (IP), including patents and trademarks. Although many insurance policies exclude IP from their coverage, it's an asset that can hold an estimated 80 percent of a company's value.
The Importance of IP Coverage
Most businesses have IP and should consider insurance coverage for this asset if they use, make, sell, or import any product or service and want to protect unique features of these products or services that distinguish them from the competition. For companies that hold patents, trademarks, and copyrights, IP insurance coverage is an essential component of risk management.
The more successful your company and/or the more innovative your IP, the more likely you are to become involved in an IP lawsuit either as the plaintiff or defendant. Data from the American Intellectual Property Law Association estimates that the average expenses for this type of lawsuit equal $3.1 million for each side, exclusive of damages. As a result, most commercial general liability (CGL) policies are insufficient to cover IP risk.
The IP portfolio held by a business may include but is not limited to:
- Patents on equipment, processes, machinery, software, or drugs.
- Copyrights on music, software, books, and online publishing.
- Slogans, company names, symbols, packaging, and other trademarks.
- Trade secrets, such as processes, strategies, formulas, and customer data.
The inability to protect this IP can make it less valuable, thus decreasing your company's revenue. If you can't defend yourself against a claim that you are infringing on another's IP, you may suffer damage to relationships with your customers, decreased stock prices, and high settlement costs.
IP Coverage Under CGL Policies
IP litigation has long been considered an inherent risk for tech companies, so the idea of specialized coverage for IP insurance is relatively new. Many CGL policies provide general coverage for IP-related injury that results from "advertising activities." However, these policies typically only cover trademark and copyright infringement and typically do not cover other types of IP infringement claims. They also usually don't cover any type of intentional infringement in most cases -- hence the need for specialized IP insurance.
Types of IP Insurance Policies
Insurance policies specifically for IP cover claims that fall outside of the aforementioned advertising injuries. Some estimates indicate that this type of insurance coverage has been growing at an annual rate of 300 percent over the past few years.
Defense coverage, or the most popular type of IP insurance, covers the costs of defending an IP infringement suit and paying associated judgments or settlements. It provides protection for claims involving patents, trade secrets, copyrights, and trademarks. Costs for these types of lawsuits that include copyright issues average $250,000 and $2 million to defend patent rights.
Companies that have an extensive IP portfolio may also opt for what's called pursuit or enforcement coverage, which supports the cost of pursuing those who infringe on their valuable IP.
For example, this type of coverage might be purchased by a small company who has concerns about their ideas being infringed upon by a larger company with greater financial resources. The latter may purposefully infringe on the smaller company's IP expecting that it can't afford to defend itself. If you are in a similar situation, having this type of coverage can protect your IP rights and your business's financial stability.
Risks of Eschewing IP Coverage
Neglecting IP coverage for your business increases the risk for:
- No longer being able to sell or market products accused of IP infringement.
- Being in a weak position when trying to license these products from the accuser.
- Needing to defend yourself against a lawsuit using your business's credit lines and cash reserves.
- Expensive royalty payments.
- Needing to settle a case rather than defend yourself because of the high cost of litigation.
- Exposing your directors and officers to claims that they are not acting in the best interests of shareholders by not insuring their IP.
Many companies do not survive an infringement lawsuit even when they are innocent of the charges. IP lawsuits are five times more common than shareholder (D&O) lawsuits, yet most companies carry the latter coverage but not the former.
If you need help with intellectual property coverage, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.