Intellectual Property Insurance Coverage
WHAT ATTORNEYS NEED TO KNOW
Intellectual property (IP) insurance is one of the least well known or understood forms of insurance. This is unfortunate because many clients could benefit from it. IP insurance can provide extremely valuable protection, particularly to firms that do not have the financial resources to sustain litigation involving their IP. IP insurance can be a particularly effective deterrent to patent trolls, for instance. The coverage may also be of interest to medium-sized firms who wish to transfer some of the risk associated with their IP.
Many IP attorneys do not know that some IP insurance policies allow the client to select the litigating counsel, or that, in addition to providing coverage for the defense of infringement claims, coverage is also available for enforcement actions against alleged infringers. Policies can also be arranged to reimburse a client for a reduction in the value of its IP due to adverse legal proceedings. IP of all kinds can be covered, including trademarks, copyrights, trade secrets, and patents.
Clients can certainly benefit from IP insurance in some instances. And an IP attorney can serve in roles associated with the insurance – primarily as independent counsel or litigating attorney (but not both).
Types of IP Insurance
IP insurance can be obtained in one of two forms. The first is a stand-alone policy that generally covers only IP. In the other form, IP coverage is included as part of a broader policy, typically a commercial general liability (GL), media liability, errors & omissions (E&O), or cyber-risk policy.
Stand-alone policies come in three variants: defensive, offensive (abatement), and first party (multi-peril). As one would expect, defensive coverage protects against claims that the client has infringed on another party’s intellectual property rights. Defensive coverage can be purchased on a defense-only basis or a defense plus indemnity basis. The defense-only policy reimburses defensive legal costs. Indemnity coverage reimburses damages. Offensive (abatement) coverage reimburses legal expenses incurred in enforcement actions against alleged infringers. First party (multi-peril) coverage reimburses IP holders against a loss in the value of their IP as a result of adverse litigation.
GL, Media Liability, E&O, and Cyber-Risk Policies
GL, media liability, E&O and cyber-risk policies typically only provide defense plus indemnity coverage. Coverage for patents is not available. Trade secret coverage is available via E&O insurance, but is difficult to find.
GL policies typically cover alleged trademark, copyright and similar IP infringement when it is associated with the advertising of a company’s own products. This may include product packaging. This coverage occurs in the advertising and personal injury section of the policy. However, when an insurance company (the Company) writes GL insurance for companies in the media business, or those that are otherwise perceived as having a high level of exposure to media-related claims, it amends the policy to eliminate copyright and trademark infringement coverage.
Specialty companies offer media liability policies, or modified E&O or cyber-risk policies, to customers who are subject to this exclusion in their GL policy. These policies often restore the copyright and trademark infringement coverage for media-related claims that have been eliminated from the GL policy. In their standard form, these supplemental specialty policies do not extend coverage to tangible products. However, endorsements that include coverage for copyright and trademark infringement associated with a tangible product are sometimes available. Although these specialty endorsements are hard to find, they provide an extremely favorable means for obtaining copyright and trademark infringement coverage for tangible products.
It is presently difficult to obtain copyright and trademark infringement coverage for certain kinds of businesses. Insurers are hesitant to cover websites that allow user generated content involving music or videos. In order to be insurable, these websites generally must have appropriate safeguards in place, including the technological means to screen for obvious infringement, and adequate take-down procedures. Video game makers are also having a tough time getting IP coverage.
The IP coverage afforded in GL, media liability, E&O, and cyber-risk policies may be superior in price and quality to stand-alone IP coverage. But as I indicated, the coverage may not be available for some risks. Cyber and E&O policies that include IP coverage tend to be much more expensive than those that do not include such coverage.
Stand-Alone IP Insurance Policies
Stand-alone IP coverage is one of the most heavily underwritten forms of insurance. And the number of entities selling coverage is quite small.
The application process for stand-alone IP insurance is unique and consists of two phases. In the first phase, an abbreviated application is completed. Within about a week, the underwriters indicate whether they think the risk is likely to be insurable, and what the price range is likely to be. They also provide a quote for the underwriting fee associated with the second phase.
The client proceeds to the second phase if it is interested in procuring the coverage. In the second phase, the client completes a very detailed application. After several weeks, a firm decision on price and availability of coverage is made. This often involves quite a bit of negotiation, and the exchange of further information. Many aspects of the coverage are negotiable, but may require additional underwriting information or higher premiums. Negotiation can be a very important part of the process for the client. In some instances, the underwriting fee must be paid before commencing the second phase of underwriting. In other instances, the fee need only be paid if a policy is purchased.
These policies do not cover situations that the client knew about before the policy period. For this reason, the insurance should be purchased as soon as possible. For instance, if the client delays the purchase of IP insurance, and in the interim, the client is notified – even informally – about a potential infringement issue, a subsequently purchased policy may not cover that infringement. So, IP insurance is most effective when purchased early.
Stand-Alone Defensive IP Coverage
Stand-alone defensive IP policies only cover claims where, at the outset of a dispute, it is determined that the client is likely to ultimately prevail in court. This may not be a straightforward determination. A critical feature of the policy, then, is who makes this determination, and how he or she does so. The policy may allow the Company or an independent counsel to make the determination. This distinction is critical, as are provisions for the selection of an independent counsel, the standards for that counsel’s methodology, the methodology used by the company to determine whether a claim is covered, and procedures for resolving any disputes in this area.
Choice of Litigating Counsel
Some policies restrict who can be counsel. For instance, counsel may need to be on a pre-approved list, or be specifically approved by the Company. The insurance policy may prohibit counsel who was previously involved in the prosecution of the IP, or who was involved in the coverage decision. In other instances, use of counsel that is not approved by the Company may result in higher co-payments and self-insured retention percentages. Policies generally include one of two provisions to control the costs incurred by the litigating counsel. Counsel may be required to abide by fee agreements and other agreements, or there may be an invoice review process.
All stand-alone defensive IP policies have some restrictive settlement provisions. These settlement provisions are very important. There generally will be a duty for the covered party to get prior written consent from the Company before making any settlement offers. And the insured must notify the Company of all settlement offers made by the opposing party. Some policies give the Company the right to settle a claim without the consent of the insured.
Under these policies, the Company does not have a duty to directly assume the defense of a covered claim. In the insurance industry, when this duty is written into a policy, it is referred to as a “duty to defend.” When there is no duty to defend, the insurance company typically reimburses the policyholder periodically as it incurs costs defending a covered claim. Some defensive IP policies give the Company the right, but not the duty, to defend.
Some policies exclude claims that commence within the early period of the policy. Renewal policies are never subject to this restriction.
Time Requirements for Claims
All policies have a process whereby the insured presents claims to the Company for a decision as to whether it is covered under the policy. All policies also stipulate a maximum amount of time for this to occur. This acts to limit the amount of time the insured has to provide evidence and information the Company needs in order to make a coverage decision. Some policies also require the timely reporting of circumstances that might lead to a claim. Policies that have this requirement also stipulate a maximum period of time for such a known circumstance to generate a formal claim under the policy.
There is generally coverage for prosecuting counterclaims related to the defense of a client’s covered IP. This should be distinguished from defenses against counterclaims brought by another party, where the client is the one who initiated the litigation.
Third Party Retaliatory Claims
Generally, defensive policies do not cover the cost of defending a counterclaim, where the client is the one who initiates an action, and the defendant then responds with a counterclaim attempting to invalidate the client’s own IP. That form of coverage is generally provided in an offensive (abatement) policy.
Coinsurance and Retention
Generally, all policies require a small, minimum self-insured retention, which is expressed as a percentage of the coverage limit. Coinsurance of at least ten percent is usually required. For instance, a ten percent coinsurance in this context would require the insured to pay ten dollars for every ninety dollars of loss paid by the insurer.
Stand-Alone Offensive (Abatement) Coverage
Stand-alone offensive policies are designed to support the enforcement of claims where the insured is likely to prevail. Offensive policies typically require independent counsel to opine that the insured is more likely than not to prevail. And, once again, there are restrictions as to who can be selected as independent counsel.
These policies tend to only provide coverage for strong cases, such as those where a client would otherwise be able to retain an attorney on a contingency fee basis. So, these policies tend to provide coverage for claims where a thinly capitalized client would still be able to enforce its rights without the policy, albeit at the price of giving up a substantial percentage of any recovered damages. The client should consider this when weighing the benefits of purchasing an offensive (abatement) policy.
Choice of Litigating Counsel
Generally, the insured selects the litigating counsel, but the Company must approve of that counsel. The litigating counsel must abide by a fee agreement and other agreements. Disputes may be handled through mediation.
In the event that litigation is successful, the Company generally may recoup part or all of its expenditures supporting the litigation.
Third Party Retaliatory Claims
Policies can be written to provide some coverage for defenses against retaliatory claims that attempt to invalidate the insured’s IP.
Coinsurance and Retention
Generally, all policies require a small, minimum self-insured retention, which is expressed as a percentage of the coverage limit. For instance, a ten percent coinsurance in this context would require the insured to pay ten dollars for every ninety dollars of loss paid by the insurer.
Stand-Alone First Party (Multi-Peril) Coverage
As intangible assets become an increasingly important component of the economy, the insurance industry is responding with products that insure intangible property on a first party basis. Many IP attorneys are quite surprised to learn that a client can be protected for the actual loss in value of its IP portfolio as a result of adverse legal developments. It is important to note that this is distinct from legal costs needed to defend or enforce rights. And it is also distinct from indemnity – actual damages that need to be paid to someone alleging client infringement.
First party (multi-peril) coverage can be an extremely valuable addition to a defensive program. For instance, business interruption coverage can be provided in the event that a court grants a preliminary injunction against the client. The loss of cash flow from IP due to an injunction can be devastating when it occurs in the midst of litigation. It can force the client to capitulate. With business interruption coverage in place, a client is better able to sustain litigation defending its IP rights.
Underlying Policy Generally Required
First party (multi-peril) coverage is generally only available as an addition to an underlying defensive and/or offensive (abatement) policy.
Perils Insured Against
A party may insure against many different perils. As I mentioned, business interruption insurance can be provided in the event of a preliminary injunction in the course of litigation. Coverage is also available for the loss of royalties or license fees as a result of a final ruling. IP portfolios can also be insured on an agreed-value basis, where the insurance applicant and the Company agree on a value during the application process. Remediation and redesign costs can also be covered.
In order to obtain this coverage, the applicant must generally produce an opinion from a qualified attorney that the covered IP is not infringing.
Enforcement and Defense
The insured must take adequate measures to protect its IP by defending itself in lawsuits and bringing actions against infringing parties. Furthermore, the Company has the right, but not the duty, to assume the defense in those instances. In the event the Company does not do so, it may effectively associate with the insured in those actions.
Typically, the underlying defensive or offensive (abatement) policy will support the underlying enforcement or defense, either indirectly, with financing, or directly, by allowing the Company to assume control of the litigation. However, there could be instances where the Company denies the claim on the underlying policy, but the previously mentioned duties of the insured and the rights of the Company still exist under the multi-peril policy. So, in order to maintain its rights under the multi-peril policy, the insured would have to exert these efforts on its own while it disputes the adverse offensive/defensive coverage decision under the underlying policy.
In the event that litigation ultimately yields proceeds to the insured, the Company generally can recover part or all of its costs from those proceeds. For instance, if business interruption coverage is triggered as a result of a preliminary injunction, and the client is later successful in its litigation, the Company may well be entitled to recovery of its earlier outlay of business interruption costs.
Intangible assets are becoming an increasingly important part of the economy. The insurance industry is moving to provide products that insure this property adequately. The insurance industry has put forward an array of IP insurance products. But many intellectual property owners do not yet know about, or fully understand, these products.
Increased utilization of IP insurance stands to benefit society, clients, and many IP attorneys. Defensive polices can be a particularly effective deterrent to patent trolls.
IP attorneys should consider advising their clients about IP insurance. It is important to note that many of the policy features discussed are negotiable. Because of this, and because of the complexity of the coverage, IP attorneys can provide invaluable aid to clients as they negotiate the terms of their policy. Attorneys might also consider reaching out to the insurance industry to potentially be included in pre-approved lists of counsel that some carriers use.
This discussion was meant to provide general information. It is not professional advice. Clients should carefully read insurance policies and consult with counsel in order to determine what an insurance policy covers.
© 2011-2014 Eric J. Weibel.This article, authored by Eric J. Weibel, was originally published in New Matter, the Official Publication of the Intellectual Property Law Section of the State Bar of California, Volume 36, Number 2, pgs 16-19. Summer 2011.