Defensive Patent Insurance
Defensive Patent Insurance pays legal expenses and damages incurred defending oneself from a weak patent assertion. Defensive Patent Insurance can provide a useful addition to a firm’s IP Risk Management Program.
Defensive Patent Insurance and IP Risk Management
After a firm has conducted rigorous landscaping and clearance around a product or technology, there is still a residual risk that an unknown patent will be asserted. Indeed, a high-proportion of patent assertions today come from out of left field, and are intended to draw out a settlement value less than the cost of defense. These patent assertions tend to be weak.
This is precisely the risk that traditional Defensive Patent Insurance is designed to protect against. It provides coverage against patent infringement litigation where the asserted patents are 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 traditional defensive patent insurance is designed to protect against the fortuitous risk of weak patent assertion.
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So, at the outset, one thing should be very clear. Traditional Defensive Patent Insurance does not cover against the risk of “flying blind” which some firms do when entering a patent thicket. (See our discussion of Product Development IP Risk Management).
The risk addressed in the lower right quadrant by traditional defensive patent insurance is quite real. Many asserted patents are weak and brought by patent trolls. Of those patents litigated to final judgement by patent trolls, a very high proportion result in an outcome in favor of the defendant.
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 patent is significantly reduced, and the fortuitous risk covered by traditional defensive patent 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.
With respect to the remaining risk, we are working on new forms of coverage that may apply to situations in the bottom left and upper right quadrants. We are hopeful that existing markets may, in certain instances, entertain risk in the bottom left quadrant at some time in the future. And we are considering a new form of coverage that would take on risk in the upper right quadrant. It is unlikely that coverage will ever be available for risk in the upper left quadrant – although in certain very particular instances a captive insurance program might make sense.
To learn more about what we are working on, see our section on High Hazard Patent Insurance.
Defensive Patent Insurance – Advanced Coverage Discussion
The following discussion goes over some of the common provisions in traditional Defensive Patent Insurance Policies. It contains material from my article in New Matter. In this discussion, Company is defined as the insurance company providing the coverage. As always, this discussion is informational in nature, and not professional advice. To determine the actual scope of coverage you must refer to the actual policy contract and endorsements, preferably with your intellectual property attorney’s advice and counsel.
Defensive Patent Insurance 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 Defensive Patent 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.
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.
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 Patent Insurance Indication Form here. The indication form is an abbreviated application that one can use get a non-binding indication. As we discussed in our overall treatment of Patent Insurance, 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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