IP Insurance for Contractual Obligations

An important use of intellectual property insurance is to provide financial stability and protection for a company's indemnification of intellectual property obligations found in contracts.

License agreements: To provide financial protection to licensee and/or licensor when the licensor agrees to defend the product being licensed and/or agrees to enforce the intellectual property rights.

Example: A university agrees to license their technology, product or patent to a company. In the license agreement the university agrees to take the necessary steps including litigation to protect and defend the product or patents. The insurance provides the university with the ability to budget future unknown litigation costs into the license agreement.

Supplier and vendor agreements: To provide financial protection to the dealer and/or vendor under the contractual intellectual property indemnity clause.

Example: A major retailer requires a vendor to indemnify them in the event they are a party to patent litigation as a result of selling vendor's product.

Mergers and acquisitions: To provide financial protection to the buyer and/or seller of a business in the event the seller's product(s) ends up in an IP dispute.

Example: Company A is buying Company B. As protection for Company A's investment and to protect the shareholders of Company B intellectual property insurance is purchased to place a "financial collar" or certainty around the transaction. 

Funds to enforce your patent rights

You have a product in the marketplace protected by one or more patents that have cost you thousands of dollars to obtain but in reality this is only the start of protecting your product from competitors.

"Patents are not worth anything if they are infringed but unenforced. Unfortunately, most investors are not in the position to do anything about it. A patent is the right to sue-a pretty empty threat if an inventor or company does not have sufficient resources to back it up"
-says Alexander Poltorak, founder of General Patent Corporation, in the book "Making Innovation Pay".

Now the time has come. This is when "the rubber meets the road",  someone is infringing on your patent rights. They are in the market with a infringing, competing product. You have two choices, ignore the infringement thereby losing your patent rights and market share or enforce your rights.

If you choose to enforce your rights the question is, do you have about $2 million to pay for the possible litigation costs? If not, where do you get the money? Here are the least attractive choices:

• Get a bank loan. Unlikely since banks don't like to fund lawsuits. Also, it will limit your ability to finance company growth.
• Find a law firm to take the case on a contingent fee basis and pay about 40% of the award plus expenses.

There is a better way, you had the foresight to purchase Enforcement Insurance. This insurance coverage is available to provide the funds when it is necessary to enforce your IP rights. It is less expensive than a bank loan typically costing 1-2% of the amount of coverage purchased.

Patent Liability Defense Insurance

One of the most traumatic and potentially financially crippling events for a company is when it is accused of patent infringement.

There are between 20,000 and 30,000 patent infringement disputes every year in the United States. Most of these disputes are resolved prior to formal litigation usually through negotiated license agreements in which the accused company pays. Many of these disputes are settled in this way because the accused company does not have the capital available to spend in litigation even if they believe their product is not infringing. The industry pejorative term for this scenario is "a holdup". Of course in just as many cases the accused company's product does infringe but almost always the company was unaware of the infringement.

About 10% of patent disputes end up in litigation. There were 3,504 patent infringement suits filed in 2010. The average litigation expense per side (not including damage awards) is $3.1 million when between $1 million and $25 million of value is at risk. The median damage award over the past 15 years has been $5.2 million.

One way for a company to protect itself is by purchasing patent liability defense insurance. A defense policy can provide up to $10 million of liability coverage. The cost (premium) of the coverage runs between 1-2% of the limit purchased. For example, a $1 million limit at 1% would be $10,000.

  

Insuring Your Intangible Assets

A commonly overlooked risk management area for most companies is their intellectual property rights (IPR). Companies purchase insurance for their tangible assets such as buildings and equipment, but what about a company's intangible assets-the right to protect their creative efforts and the freedom to sell their product in the marketplace? According to some reports intellectual property can be a company's most important asset, accounting for as much as 80% of a company's valuation. Yet it is rare for companies to address IPR as a risk management issue. Virtually all general liability insurance policies now exclude coverage for intellectual property.

Fortunately, another kind of insurance coverage is available-IP insurance. There are four types of IP insurance that can help companies better manage risks associated with intellectual property. They are:

• Defensive IP insurance: Provides protection in the event your product is accused of patent, trademark or copyright infringement.
• Enforcement (Abatement) IP insurance: Provides capital in the event another entity is infringing on your intellectual property rights.
• First Party Riders: Provides coverage to pay you for loss of income, design around costs, etc. in the event your product is found to be infringing. 
• Representations and Warranty insurance: Provides satisfaction for indemnity agreements in contracts such as supplier agreements.