What Is Intellectual Property Insurance?

Intellectual property insurance protects inventors and companies if they're sued for infringement by another company. The most common type pays for legal fees and monetary damages if you're found guilty of intellectual property infringement. Pursuit policy insurance is another form that helps pay expenses if you must sue someone for intellectual property infringement.

What Is Intellectual Property?

Intellectual property is divided into two categories:

  • Industrial Property: This includes patents, trademarks, and industrial design.
  • Copyright: This covers artistic works. Examples include books, films, music, paintings, photos, and sculpture.

The Rising Costs of Intellectual Property Litigation

Intellectual property insurance is vital to businesses because of the rising costs of litigation. These expenses can cause day-to-day operations to suffer. In some instances, an intellectual property lawsuit can cause a company to go out of business. Furthermore, intellectual property lawsuits are becoming more frequent as more patents are issued. One percent of patents come under litigation in their lifetime. However, intellectual property insurance litigation rose 29 percent from 2011 to 2012 due to the largest number of cases ever (5,189). Certain industries are also more likely to face lawsuits.

Pharmaceutical patents have a 25 percent chance of being involved in a lawsuit. Key technologies come in second at 10 percent. The reason that these industries have a higher likelihood of litigation is that they represent big money. In addition, they have small tweaks on existing patents that current patent holders fight to protect their interests.

On the whole, intellectual property lawsuits are the result of companies trying to gain an advantage over other businesses. The problem is that these lawsuits aren't always factual. Larger companies get an edge just by throwing a smaller company into the litigation process. Some companies also take an aggressive stance on copyright infringement or patent design. This almost guarantees a conflict.

One problem you may find is that the United States Patent and Trademark Office (USPTO) keeps their patent applications hidden. This causes infringement even if your company acts in good faith. There's no notice of liability until you receive a lawsuit notice. Changes in USPTO policy may prevent this in the future, but there's still a chance that you will become the victim of a lawsuit.

If the defendant wins the case, the court may award them lawyer's fees. However, this won't happen for years. In the meantime, defendants are responsible for paying their own legal costs. This causes you to come up with cash for fees while running a business at the same time. The costs of fighting are high, but losses are even worse. Here's a sample of the expenses associated with large intellectual property infringement cases.

  • Stac Electronics v. Microsoft - $120 million
  • Honeywell v. Minolta - $128 million
  • Fonar v. General Electric - $128 million
  • DCS Communications v. General Instruments - $140 million
  • Polaroid v. Kodak - $900 million
  • Honeywell v. Litton - $1.2 billion

In addition, Kimberly Clarke and Procter & Gamble waged an estimated billion dollar "diaper war." However, both firms had enough assets and resources to see the intellectual property battle to the end.

Though these cases are the exception, they still show how much money is lost if you don't win the battle. Average cases cost between $50,000 and $3 million. These awards issued by the court include several factors.

  • Lost profits
  • Attorney fees
  • Interest assessments
  • Royalties
  • Punitive enhancement

This may not bankrupt a company, but it can cause problems. For this reason, smaller firms offer to settle out of court to limit costs. This includes both plaintiffs and defendants.

What Are the Types of Intellectual Property Insurance?

Intellectual property insurance policies have grown by over 300 percent in recent decades. Most of these policies are "defense," although "pursuit," "abatement," or "enforcement" policies are growing in popularity.

  • Defense
    • This type of policy covers settlements and judgments resulting from a lawsuit against the policyholder.
    • This insurance is best for companies with revenues from $500,000 to $25 million.
    • This can also include indemnity insurance.
  • Pursuit, Abatement, Enforcement
    • This type of policy is known by all three names. It allows the policyholder to sue intellectual property infringers.
    • This covers all legal costs associated with an intellectual property lawsuit.
    • It deters infringement.
    • It strengthens the licensing attractiveness for other companies.
    • It protects executives from personal liability.

Without coverage, a company has alternatives such as:

  • Abandon the intellectual property rights
  • Settle outside of court
  • Pay a forced royalty
  • Enter into a licensing agreement. This is typically done in an instance of financial weakness.
  • Rely solely on their commercial general liability policy
  • Use reserve capital to fight the case
  • Sue or file a countersuit against the other party

Thankfully, most insurance companies tailor these policies to meet the needs of the policyholder. Policies also help shift the power structure. Larger companies know that the smaller company isn't paying for the litigation. This allows small companies to get a favorable settlement out of court.

These tailored policies also provide coverage for intellectual property exposure. This is namely in patent infringement. However, each policy is entirely based on the unique concept and design of intellectual property. Because of the one of a kind nature, each insurance company makes a policy based on clients' needs, objectives, and coverage amount. This falls under three categories:

  • Offensive Policy
    • Also known as infringement abatement insurance or enforcement insurance
    • This policy reimburses the insured for any legal costs when pursuing an infringer.
  • Defensive Only Policy
    • Also known as defense cost reimbursement insurance
    • This policy covers defense only against the suing party.
    • It does not pay any type of damages.
  • Defense and Indemnity Policy
    • This policy covers defense the same way as a Defensive Only Policy.
    • In addition, it pays for any damages awarded to the suing party. This includes prejudgment interest.

Some of the top benefits of infrigement abatement insurance include:

  • Prevention of market share loss
  • Protection of directors, executives, and officers from litigation for failure to enforce patents or pursue litigation.
  • Strengthen the licensing abilities of intellectual property
  • Protection of company balance sheet by saving cash on hand
  • Increase the value of the company to shareholders or investors because of intellectual protection.
  • Deter potential lawsuits by showing financial means to defend
  • Provide enough defense funds to increase the possibility of winning an intellectual property lawsuit.
  • Reduce pressure to settle for lesser terms due to legal expenses or lack of funds.

Types of Insurance That Cover Intellectual Property

  • Standard Policies
    • General Liability
      • This insurance protects businesses from bodily injury and property damage. However, it may also cover personal and advertising injury. This protects advertising activities that may fall under intellectual property. It includes copyright and trademark infringement against advertising content.
      • It generally costs as little as $500 a year.
    • Media Liability
      • General liability typically excludes publishing companies. Media liability is more expansive and covers publishers.
      • This also covers user-generated content on a company's website.
      • Most media liability policies come with cyber liability insurance and errors and omissions insurance.
      • Rates are $1,000 to $1,500 per year for $1 million of coverage.
  • Specialty Policies
    • Patent Insurance: This product protects against patent infringement lawsuits brought against a company.
    • Patent Infringement Insurance: This product protects against other companies infringing on your patent.

Standard policies do have limitations:

  • They cannot protect against patent infringement.
  • They cannot sue someone for infringement.

Specialty policy limitations include:

  • Prohibitive costs as much as $50,000 per year.
  • Finding a reputable underwriter for a policy.

Why You Should Consider Intellectual Property Insurance

According to a recent survey, CEOs consider intellectual property management as one of their top three risks. Intellectual property is also regarded as a company's most valuable asset. In most companies, it's 80 percent of total value. Even for firms that don't have the resources to protect it, it's still the lifeblood that allows them to operate. Intellectual property includes:

  • Trade secrets
  • Patents
  • Copyrights
  • Trademarks
  • Product packaging
  • Advertisements
  • Marketing

The biggest problem is that not all companies realize they're at risk. The main reason to get intellectual property insurance is to:

  • Protect their market share.
  • Defend against frivolous lawsuits.
  • Deter lawsuits from occurring.

Patent trolls are also a concern. Also known as patent assertion entities (PAEs), these companies sue solely to get licensing fees on a patent.

Because smaller companies don't have the capital to deal with a court battle, intellectual property insurance is a must. This prevents any disruptions in business operations and protects the capital needed to develop new products.

For example, let's take the Octane v. Icon case. Both companies manufactured ellipticals for gyms. Icon was the larger company and sued Octane for infringement. However, they did this only to get royalties and nothing more. In the end, the court sided with Octane. Even though Octane won, they still were left with a $1.7 million legal bill.

Intellectual Property Insurance and Attorneys

Both attorneys and companies benefit from intellectual property insurance. An attorney can instill goodwill and trust in their client. The attorney can also provide:

  • License Agreements: When drafting a license agreement, the attorney can require that the other party have an intellectual property policy.
  • Supplier Agreements: This requires all suppliers to have intellectual property insurance.
  • Non-infringement Opinions: This provides a legal opinion for the type of intellectual property insurance needed.
  • Claim Submissions: Intellectual property insurance policies need a favorable opinion from a lawyer at the time of claim.

Problems With Intellectual Property Insurance

One of the hurdles of intellectual property insurance is finding an insurance company willing to take on the risk. Underwriters refuse to write these policies because of the lack of historical information. Plus, many don't consider intellectual property a tangible asset. This makes it harder to defend in court.

Companies are passing on intellectual property insurance as well. This is due to a lack of education or awareness. Some companies also falsely believe they are covered under their commercial general liability (CGL) insurance. However, these policies only deal with financial injury from advertising activities. Other intellectual property is rarely covered.

Lack of intellectual property insurance may also create unnecessary director and officer (D&O) exposure. This makes executives liable for financial damages in an intellectual property case.

It's also important to note that the insurer and policyholder must enforce the policy to get reimbursement.

Underwriting Intellectual Property Insurance

When underwriting intellectual property insurance, underwriters consider:

  • Ease of entry into the marketplace
  • Profitability of the patented item
  • Initial capital investment
  • Current disputes with licensees
  • Existing licenses
  • Notification from other companies stating an infringement
  • Suspicion of infringement
  • Activities required to abate infringement
  • Request from third parties that they receive a license

Companies must have most of these factors to get intellectual property insurance.

Frequently Asked Questions

  • Who provides intellectual property insurance?

A number of companies offer intellectual property insurance. However, many don't offer policies because of risk. At the forefront is the Intellectual Property Services Insurance Corporation (IPSIC) which has offered this insurance since 1990. Their InventPro policy protects smaller companies with one to three patents from infringement. Another company - Willis - has the PatentWize product. Partnering with business intelligence platform Innography, this product manages patent risks. With this software, companies can manage their intellectual property with access to patent, legal, financial, and trademark information.

  • How much are intellectual property insurance premiums?

Companies that only need a defense policy can expect to pay between $2,500 and $3,500 yearly. Larger companies that need a defense and an indemnity policy have a yearly premium between $3,000 and $20,000. Other policies depend on the policy term and total 2 to 5 percent of the total coverage.

  • Are any aspects excluded from intellectual property insurance?

The insurance marketplace doesn't have an all-inclusive intellectual property product. Some exclusions are fines, penalties, and willful infringement.

  • Do I need to do anything before getting intellectual property insurance?

Most policies require that you do an intellectual property search or that you have previously filed for a copyright, trademark, patent, or service mark.

If you need help with intellectual property insurance, 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 and Yale Law and average 14 years of legal experience, including work with or for companies like Google, Stripe, and Twilio.