Intellectual property insurance
October 2022 | TALKINGPOINT | INTELLECTUAL PROPERTY
Financier Worldwide Magazine
October 2022 Issue
FW discusses intellectual property insurance with Sean Doyle at Ambridge Partners LLC.
FW: Could you explain the rising importance and value of intellectual property (IP) to businesses today? To what extent can it be considered the most critical asset for certain companies?
Doyle: Intellectual property (IP) has been important to the success of companies both large and small for many years. That said, the continued growth of technology in virtually all industries, along with the gradual expansion of patentable inventions over the decades, has resulted in more and more companies recognising the importance of protecting their IP. This can be seen in the continued growth of patent filings by companies worldwide. Similarly, the expansion of trademark protections has resulted in an increased focus on protecting the identifying attributes of a company. The ability to better protect a company’s inventions and originality only serves to underscore the importance and inherent value that companies see in their IP. There are multiple studies that show enormous value behind IP, one of which I believe recently showed that these assets account for approximately 90 percent of S&P 500 companies’ collective value.
FW: In your opinion, how important is it for companies to consider obtaining specialised insurance to manage or protect against risks associated with IP? What are the potential benefits?
Doyle: In light of the value of IP to most companies today and the potential liability and financial exposure to IP claims, the ability to manage and protect against IP risks through insurance is something all companies should consider. Not surprisingly, as increased value is placed on a company’s IP, there is an increased desire for companies to protect these assets. In some instances, IP owners are not only looking to protect their IP, but also capitalise on its value through licensing campaigns and other enforcement tactics. We see this from both operating companies and non-practicing entities (NPEs). The high costs associated with IP litigation, not to mention the exposure to large damage awards, can have a significant impact on a company’s balance sheet. For small companies, the cost of simply defending an IP claim could bankrupt them, even if the claim is frivolous in nature. Insurance can provide companies with the ability to vigorously defend against claims without compromising the company’s financial strength, competitive position or other aspects of the company’s operations.
FW: What types of IP insurance coverage are available? What aspects does insurance typically cover?
Doyle: There are currently several different insurance products available on the market. The most common and beneficial from a general risk mitigation perspective is an IP liability policy. In general, an IP liability policy will respond to third-party claims alleging IP infringement, IP indemnification claims brought under licences or other agreements, and invalidity challenges to a company’s IP portfolio. The policy may also provide other benefits such as coverage for counterclaims, administrative proceedings or workaround costs. While these policies typically cover actions brought against the insured, there is also a more limited market providing enforcement coverage as well. These policies can also be tailored to the specific needs of a company. For example, worldwide coverage or jurisdiction specific, or coverage for all IP and products or just a subset. IP contingency coverage is another type of IP coverage available. This product is most often used to address risks associated with an ongoing IP dispute or the potential adverse outcome on appeal. A third type of IP coverage is protection for a breach or inaccuracy of an IP representation, warranty or indemnity made in the context of a transaction agreement. For many transactions, the accuracy of the IP representations and warranties are critical to the value of the assets, so this product can provide an added level of protection if a breach occurs.
“Despite the enormous value behind IP, only a small fraction of companies has IP insurance, or for that matter, are even aware that this coverage is available.”
FW: Could you outline the typical process of obtaining a policy, such as the application process, information required and underwriting considerations?
Doyle: The process of obtaining a policy begins with the company working with a broker to complete an application. The application asks for basic information about the applicant’s operations, products, services and IP as well as identification of IP indemnity obligations, IP dispute history and key competitors. Each risk is unique, so the goal of the application is to provide enough information so that initial terms can be put together. Along with terms, a draft policy wording for the company to review is provided. If a company is interested in moving forward, an underwriting call is scheduled to address specific topics that could benefit from further detail and discussion. For example, a company’s IP policies and procedures, proprietary technology and future plans are often discussed. A company also has the opportunity to ask questions and discuss coverage points to ensure the coverage it wants is provided. Next, the wording of the policy is negotiated and, once agreed and with any follow-up requests addressed, the insurer can bind the policy. The entire process can typically be completed within a matter of days, assuming the swift provision of requested information. A policy is designed to be an annual renewable policy, and while the renewal process can be similar to the foregoing, it is typically more streamlined.
FW: In addition to protecting the company’s own IP, how can insurance help a company in the event that it inadvertently infringes the IP rights of others?
Doyle: The types of risk and potential quantum of damages can certainly vary by industry and jurisdiction, but there is IP risk in virtually all industry sectors and jurisdictions. Certain industries may be a more frequent target of NPEs and patent infringement claims, while others may be the target of frequent trademark or copyright actions. The policy would reimburse the company for covered defence costs, damage awards or approved settlement amounts that are incurred. This protection can provide significant and meaningful benefits to a company. For example, knowing it has protection against costly litigation risks can allow a company to allocate its capital to other important operations, such as new product development or marketing. Another potential benefit is the company’s ability to limit its exposure for indemnity obligations. It is common practice for companies to provide an IP indemnity for its customers’ use of their technology. This means that every time the company signs up a new customer, it is potentially expanding the scope of its risk. It is also not uncommon for large customers to require monetary indemnities that a company may not have the ability to cover, so a policy that provides protection for third-party infringement can also be very beneficial in this context, particularly for smaller companies.
FW: How would you describe the current market for IP insurance? Are you seeing increasing demand from companies, and rising competition among providers?
Doyle: Despite a limited number of markets that offer IP insurance, there is a healthy amount of competition and options for companies seeking coverage. The most important thing for the IP market at this time is raising awareness of the existence and utility of the products. Despite the enormous value behind IP, only a small fraction of companies has IP insurance, or for that matter, are even aware that this coverage is available. Fortunately, as awareness has grown, we have seen a considerable increase in interest and demand for the products. I expect that trend to persist as awareness continues to grow.
FW: What essential advice would you offer to companies when assessing the various policies, premiums and providers in the market, to ensure their needs are met?
Doyle: There are different products for different situations, for example a liability policy for unknown risks versus a contingency policy for known risks. When considering a particular type of policy, broadly speaking, different providers will offer similar underlying protection but there are certainly coverage differences between providers, so I would strongly recommend that a company perform a thorough review of the policy wording when choosing a provider. And because these policies can usually be tailored to address the specific needs of the client, companies should not hesitate to negotiate policy wording when they believe it is necessary.
FW: How do you expect IP insurance products to evolve in the years ahead? To what extent can policies be shaped to narrow or eliminate gaps in coverage, or to become more relevant and appropriate to specific industries and sectors, for example?
Doyle: As companies become more aware, I expect to see significant growth for IP insurance products. Not only do I expect to see growth for the products that currently exist, but also in the creation of new IP products. I have already witnessed new IP products come to market over the past few years. Fortunately, even with the existing products available, most can be tailored to address the needs of specific industries and sectors.
Sean Doyle is senior intellectual property counsel and senior vice president at Ambridge Partners where he is responsible for creating tailored solutions for clients seeking IP protection either in the ordinary course of business, or in connection with business agreements such as licensing agreements, financings and investments or M&A. He is also responsible for underwriting Ambridge’s IP contingency product which responds to one-off legal, judicial and legislative IP risks. He can be contacted on +1 (212) 871 5439 or by email: sdoyle@ambridge-group.com.
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