What you need to know about Intellectual Property Insurance

Intellectual property insurance protects you from someone stealing your IP – or from someone accusing you of doing so.

What Is Intellectual Property Insurance?

IP insurance protects businesses from the legal and business costs of intellectual property infringement or theft. It also covers the expense of settling litigation when you are accused of intellectual property infringement or theft. 

There are two basic forms of intellectual property insurance:

  1. Defense protection is the most common form of intellectual property insurance. It protects you from violation charges made against you by an IP owner  This can be a competitor, a patent troll, or any inbound litigation.
  2. Enforcement or Pursuit coverage This coverage provides financial backing for you to protect your IP rights. Policies will give you the ability to assert your IP against someone who steals or copies you.

If you are licensing or selling your products to another company, especially a bigger company, you are typically required to indemnify your customer for inbound law suits, or you may be required to enforce your patents against other companies who steal your IP. Both of these scenarios are protected under Intellectual Property Insurance.

IP insurance is often required when you finance your patents. BlueIronIP, for example, typically purchases a patent enforcement policy for every patent it finances.

What Is Intellectual Property?

There are two types of intellectual property: 

  • Patents, trademarks, and copyrights are protected when you file a patent application, register your trademark, or publish written or artistic content. These types of IP are what most people think about – but they are often missing a huge portion of their real intellectual property.
  • Trade secrets are everything else: your internal processes, computer algorithms, computer databases, your customer lists, manufacturing processes or machines, recipes, your business contracts, and anything else that gives you a business advantage. Trade secrets are often as valuable – if not more than – the normal patent, trademark, and copyright material.

Intellectual Property Litigation’s Rising Costs

Because of the increasing costs of litigation, enforcing or defending your intellectual property is becoming a big risk for companies. These costs can be devastating for smaller companies, but still remain a problem for bigger companies. An intellectual property lawsuit may force a company out of business in some cases. 

In the United States, for example, where the litigation climate is especially hot right now, IP litigation case costs (including litigation expenses and penalties or settlements) can be as much as $700K for $1M at risk. Think about that – both sides are going to spend $700K to argue about $1M. For bigger disputes, the costs can exceed $4M. In European courts, the loser of litigation pays the winner’s attorney’s fees, and the litigation costs are often lower.  Further, China’s patent enforcement system has been modernized, and China is making IP enforcement a cornerstone of their business practices.

How to Manage the Financial Effects of Intellectual Property Risk

When it comes to managing the possibility of intellectual property lawsuits, preparation is the key. Most companies do not realize how much intellectual property they have.  Once the companies understand their IP,  it is critical for businesses to protect that IP in order to establish ownership of it. It is much easier to enforce IP that has been protected with a patent, copyright, or trademark. If the IP is not protectable with patents, copyrights, or trademarks, the company’s trade secrets have to be properly protected.

In addition to formal protection, businesses may use written agreements to better secure their intellectual property rights. Employment contracts, non-disclosure agreements, non-competitive agreements, and licensing agreements are examples of these types of written agreements. Having a paper trail and keeping track of the individuals involved in that paper trail is important.

What Are the Different Kinds of Intellectual Property Insurance?

Intellectual property insurance is still in its infancy. Although there have been insurance policies available for 20+ years, there are several new entrants to the market that are addressing different needs. Of the dozen or so companies offering IP-related insurance, each one has a different perspective of what they want to cover.

Defense Insurance

  • This form of policy protects the policyholder from settlements and penalties when someone accuses you of violating their IP.
  • This insurance is essential for businesses with sales ranging from $500,000 to $25 million, as a single IP lawsuit could wipe out the company.  For larger companies, IP insurance helps them manage their cash flow and transfers the risk of IP litigation outside the company.
  • Some insurance companies cover inbound lawsuits from non-practicing entities (“patent trolls”), while other insurance companies prefer to cover lawsuits from competitors. 
  • Defense policies typically cover the settlement costs of the lawsuit, not just the attorney’s fees and expenses.

Enforcement Insurance (sometimes called Abatement or Pursuit)

  • This form of policy allows you to go after companies who infringe your IP.  These policies give you the power to sue a competitor that steals your IP. 
  • This covers all expenses incurred as a result of an intellectual property case, including attorney’s fees and costs.
  • Patent enforcement insurance usually covers countersuits by a defendant, including when a defendant challenges your patent in an Inter Partes Review.
  • You have full control of the lawsuit under an insurance policy, which you don’t have if you have to use contingency fee law firms.

Indemnity Insurance

  • When you sell your product or services to someone else, they might be sued for IP infringement.  As a provider, you might be required to indemnify your customer for all IP lawsuits.
  • An IP defense insurance policy typically indemnifies your customers from legal action.

Trade Secret Insurance

Your trade secrets can be insured against loss. A typical policy will pay you damages for the loss, but also vigorously go after the theft, including working with law enforcement and recovering civil penalties.

Trade secret protection requires that you manage the trade secrets internally to prove your ownership.

What if you don’t have insurance?

If a business does not have coverage, it has options such as:    

  • Give up your intellectual property rights.
  • Reach some kind of settlement agreement outside the courtroom.
  • Pay a compelled royalty that you don’t want to pay
  • Sign a license agreement with very bad terms. This is usually achieved in times of financial distress
  • Use contingency fee attorneys to prosecute the case – and give up control of any settlement.

Most insurance firms adapt these plans to your specific needs. Policies also play a role in shifting the power system. Larger corporations sometimes adopt the “efficient infringement” strategy – where they dare a smaller company to sue them. The bigger company has the advantage because they have more money, and they think an IP lawsuit will bankrupt the smaller company.

Things change when the big company finds out that a smaller corporation is not paying for the litigation – because they have an insurance policy. This enables small businesses to reach a much more favorable resolution. 

Why do I need IP Insurance?

The following are some of the most important advantages of infringement abatement insurance:

  • Directors, executives, and officers are shielded from liability for failing to enforce patents or seek lawsuits.
  • By keeping cash on hand and not spending it on lawsuits, the company’s balance sheet is protected.
  • Deter future litigation by demonstrating your financial ability to protect yourself.
  • Provide sufficient defense funds to increase the likelihood of a successful intellectual property case.
  • Reduce the pressure to settle for less favorable terms due to legal fees or a shortage of funds.
  • Patent insurance makes your company more valuable.

Different Types of Insurance that sometimes cover IP:

There are several standard types of insurance coverage that include some form of IP coverage. However, many times these policies explicitly exclude many types of intellectual property.

  • Comprehensive General Liability – This insurance covers companies from bodily harm and property damage. It can, however, cover personal and advertising injury. Most Comprehensive General Liability policies specifically exclude enforcing or defending patent-related lawsuits.
  • Media Liability- Generally, publishing companies are not covered by general liability insurance. Media liability is broader and includes advertisers. User-generated content on a company’s website is also protected. Most media liability plans include cyber liability protection as well as mistakes and omissions coverage.  Media liability policies typically do not include patents or other IP.

Drawbacks to standard policies:

  • They are unable to have protection against patent infringement.
  • They are unable to sue others for infringement.

When assessing and purchasing an intellectual property policy, it is important to talk with a professional broker who is familiar with the product and understands the scope of coverage. If you want to defend your company from a frivolous lawsuit, discourage litigation from occurring, or protect market share, get intellectual property protection today.