Defensive Intellectual Property Insurance
Defensive Intellectual Property Insurance Basics
Defensive IP Insurance pays legal expenses and damages incurred defending oneself from a weak IP assertion. Defensive IP Insurance can provide a useful addition to a firm’s IP Risk Management Program. After a firm has conducted rigorous landscaping and clearance around a product or technology, there is still a residual risk that an unknown intellectual property right will be asserted. Indeed, a high-proportion of IP litigation today come from out of left field, and are intended to draw out a settlement value less than the cost of defense. These IPR assertions tend to be weak.
This is precisely the risk that Defensive Intellectual Property Insurance is designed to protect against. It provides coverage against IP litigation where the asserted IP is relatively weak in terms of legal merit. Specifically, the policy contract requires that an early determination be made about the legal merits of litigation. As an example, the insurance company might require a letter from an independent attorney stating that the defendant is likely to prevail legally in upcoming litigation.
In addition to this contractual language, the policies are carefully underwritten. If known threats are identified, then it is likely that the underwriter will require a high retention (like a deductible) or an exclusion in relation to the specific threat.
So defensive IP insurance is designed to protect against the fortuitous risk of weak IPR assertion.
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So, at the outset, one thing should be very clear. Defensive Intellectual Property Insurance does not cover against the risk of “flying blind” which some firms do when entering an intellectual property thicket. (See our discussion of Product Development IP Risk Management).
The risk addressed in the lower right quadrant by defensive IP insurance is quite real. Much asserted IP is weak or not applicable and brought by trolls or overbearing competitors.
The amount of risk you are bearing in the lower left hand quadrant is dependent on whether you are “flying blind” or not, and if not, the quality of your clearance and search efforts. If you did an exhaustive landscaping and clearance operation, then the threat that you are likely to be infringing a valid IPR is significantly reduced, and the fortuitous risk covered by Defensive Intellectual Property Insurance is a relatively large component of your overall residual risk.
It is important to remember that while the insurers do conduct extensive underwriting, this is not the same as doing clearance and getting a freedom-to-operate opinion. The underwriting is not a substitute for an opinion letter, and it cannot be relied on as professional advise.
Advanced Coverage Discussion
For an advanced, if slightly dated discussion of intellectual property insurance coverage provisions, see material taken from my article in New Matter here. For a quick rundown, read on.
Some important coverage features include:
- Covered Claims
- Choice of Litigating Counsel
- Waiting Period
- Time Requirement for Claims
- Coinsurance and Retention
Defensive IP Insurance Policies only cover claims where, at the outset of a dispute, it is determined that you are likely to prevail in court. Therefore, it is very important to review policy provisions governing how such determinations are made. This area should be a key point for negotiation.
Choice of Litigating Counsel
Some policies restrict who can be counsel. You should pay careful attention to policy provisions in this regard.
All Defensive Intellectual Property Insurance 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. For policies that include this provision, this is typically not negotiable.
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. Make sure you know what your policy requires in the event you are faced with a claim or circumstances that might lead to a claim. Otherwise you might jeapardize your coverage under the policy.
There generally is coverage for counterclaims against a suing party’s intellectual property if such a strategy makes sense. But, there generally is not coverage for claims made against you in the event you began litigation. So, if you sue somebody for infringement and they countersue you, there is no coverage for that. That coverage is sometimes made available in Offensive policies.
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 7.5 percent is usually required. For instance, a 7.5 percent coinsurance in this context would require the insured to pay $7.50 for every $92.50 of loss paid by the insurer.
Alta is focused on this line of business. Contact us today if you are interested in applying for Defensive Patent Insurance.
You may download Alta’s Defensive Intellectual Property Insurance Indication Form here. The indication form is an abbreviated application that one can use get a non-binding indication. A non-binding indication is produced in the first phase of underwriting. Underwriters generally respond with an indication as to whether they think the risk is insurable, and they provide a rough non-binding price range. It takes about a week to get non-binding indications turned around from the various underwriters.
If at that point you are interested in obtaining a formal quote, a more lengthy application must be completed and rigorous underwriting is conducted. As we said, that process can take several weeks.
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