Defense Insurance For Intellectual Property Risks

Nearly every business has exposure to others’ intellectual property (IP) rights.    Anyone who makes, uses, or offers for sale any product or service may be accused of infringing on someone else’s patents. The name you use for your company, product, or service could trigger allegations from owners of trademarks. Using pictures, text, video, audio, or computer software can implicate copyrights owned by others.   Litigating these cases often become expensive, with defense of a moderate size patent case costing an average of $2.9 million before any settlement or damages.

Many forms of insurance are reluctant to cover IP disputes because the triggering events are often brought about by business decisions made to offer products or services, utilize trademarks, or publish materials.   The usual inclination of insurance to exclude intentional acts makes carriers wary of covering the risk of business decisions without sharing in the potential business rewards of those decisions.

Existing business insurance policies may cover some IP disputes, and risk professionals should be ready to look for places to seek coverage before a conflict has arisen.   However, general coverage forms often exclude or restrict whether IP conflicts are insured.   Specific IP defense policies are much more likely to respond affirmatively when defending allegations of IP infringement, and can provide expert assistance for an insured unfamiliar with this particular type of litigation.

What Is The Threat?

An insured’s competitors may have incentive to assert IP claims to slow down or stop their rivals, sometimes with frivolous assertions. Entities of all sizes can use insurance coverage for IP claims to level the playing field against well-funded opponents and assure that they can afford to get their defenses a fair hearing in court. This helps eliminate the risk of losing not on the merits, but simply because you couldn’t afford to match the opponent’s legal spending.

Non-practicing entities (NPEs) may own patents, and derive income only from licensing those patents. Sometimes derided as patent trolls, NPEs are not subject to the risks of their targets suing back on the target’s patents, because the NPE isn’t selling infringing products. Patent defense coverage can help deter NPEs who are looking for quick settlements from companies unprepared to respond.   Aggressive assertions of trademarks or copyrights can also create vexing asymmetrical dynamics.   Insurers with experience handling similar claims can help guide insureds through these sometimes frustrating cases.

Without the freedom to operate, businesses are exposed to uncertainties of potential disruption of their sales offerings, and liabilities for infringement of others’ rights.   Owners of rights in patents, trademarks, and/or copyrights can suppress competitors, or drain resources that businesses would otherwise use to grow.

Finding IP Coverage In Existing Policies

The best time to find coverage is before a threat, so the broker isn’t looking for fire insurance after the house already caught fire. However, even after a company has been accused of infringing upon others’ IP, risk professionals should review current policies to see if coverage might apply.

Commercial General Liability (CGL) policies usually offer some limited options under the personal and advertising injury provisions, but that language has evolved to restrict or remove application to many IP disputes.   A typical CGL or Business Owner’s Policy is likely to have coverage for “advertising injury” which may include injury arising out of “Infringement of copyright, slogan, or title of any literary or artistic work, in your ‘advertisement.’”   “Advertisement” is usually defined with examples like radio, TV, or online solicitation to induce the sale of the goods or services. However, that definition is likely to exclude the labeling or packaging of the goods. This means that simply because a product’s existing name is used in an advertising, the advertising injury provisions are not applicable.

Policies like a CGL are also likely to have separate exclusions that the policy does not apply to conflicts “arising out of any violation of any intellectual property rights such as copyright, patent, trademark, trade name, trade secret, service mark or other designation of origin or authenticity” other than “infringement, in your ‘advertisement,’ of (a) Copyright;

(b) Slogan, unless the slogan is also a trademark, trade name, service mark or other designation of origin or authenticity; or (c) Title of any literary or artistic work.”   The effect of this exclusion of IP in CGL is that all patent cases, and copyright or trademark cases not exclusively triggered by advertising, are outside the coverage of these policies.

Many companies have Errors & Omissions and/or Directors & Officers forms of coverage, but these generally have broad exclusions for IP cases.   Professional Liability policies may have limited coverage only if a professional has given advice or provided services that is the direct cause the infringement allegations, but further exclusions may still apply.

Media and Cyber policies have a variety of forms that usually exclude all patent disputes. They may have limited coverage for trademark or copyright infringement allegations, but only if those cases are directly caused by the insured’s activities in the media or online, respectively.

General insurance policies were usually not created with IP in mind, and have evolved with increasing limitations on non-core exposures. Finding coverage for an IP dispute in general insurance policies can feel like fitting a square peg in a round hole.

Common Elements of IP Defense Policies

Specialized IP defense insurance policies are designed to cover legal costs of responding to allegations of infringement and paying potential settlements or damages.   They transfer the risk and reduce consequences of IP litigation.   Brokers may need to look beyond their familiar sources to engage with these dedicated programs so that their insured becomes part of a program with expertise in IP protection.

Litigation over patents, trademarks, or copyrights often requires legal procedures that general liability policy forms may not anticipate. IP specific policies should explicitly include coverage for unique procedures in IP litigation, such as petitioning the patent office to reconsider the validity of asserted patents.

IP defense coverage may be tailored to each company’s risks, with options to cover patent, trademark, and/or copyright exposures. The insured activities may be specified by the policy to make clear the scope of the risk transfer, or may be more broadly defined for all potential activities of the company. Because IP defense policies transfer what may be business risks, carriers have incentive to use diligence to understand the applicant’s position, and limit their exposures in unreasonably risky circumstances.

Examples of Benefits of IP Defense Coverage

Sometimes simply holding IP defense coverage can deter continued assertions against an insured. A personal care company was sued by a competitor, threatening to bully them out of the business with threats of drawn-out and costly litigation on frivolous claims. When the defendant informed the IP owner that they had IP defense coverage, the dynamics shifted radically. The plaintiff realized it would pay its own legal bills while the defendant would benefit from insurance funding. The case quickly was dismissed. Attorneys for insureds enjoy these moments where “you could have heard a pin drop” as assertions are stymied by an unexpected reveal of IP defense insurance.

Octane Fitness created and sold elliptical exercise machines. A much larger competitor asserted patent infringement, but having insurance helped Octane reach a court decision on the merits which it could likely not have otherwise afforded. The case was eventually appealed all the way to the United States Supreme Court, who changed the law in a unanimous ruling that defendants could pursue their costs against plaintiffs for frivolous assertions. Intellectual property is an area mostly outside of political divides, but resources are necessary to fully defend even the most unfairly targeted.

Protecting Freedom To Operate With Insurance

Attorneys may write letters telling their clients that they should have freedom to operate using technologies or trademarks, but those opinions come with no way to pay for the defense of infringement assertions. Insurance can provide the backstop for the costs of protecting a company’s access to the marketplace.

Objections may include “we don’t have any patents, why do we need patent insurance?” Owners of patents can enforce them against anyone who makes, uses, or sells a technology, regardless of the defendant’s IP holdings.   Often, those without their own formal IP are the most vulnerable, because they have not done the diligence to survey the relevant landscape.

Some supplier or licensing agreements may require indemnity against IP claims. By holding an IP defense policy with defined categories for additional insureds, those suppliers or licensors can satisfy that indemnity without taking on the full risk themselves. This can give the insured a market advantage, sharing their coverage against IP risks with customers or clients.

Obtaining an IP defense policy generally requires the applicant to disclose its revenues, any IP assets it owns and uses, and any initiated or expected IP disputes or threats. Detailed information about the technology or activities to be insured can help make the carrier’s underwriters more comfortable with the risk. Policies are usually structured for claims made and reported, covering threats and disputes that arise during the coverage even if the accused infringing activities began prior to the policy.    

When discussing “IP insurance,” “patent infringement insurance,” “trademark infringement insurance,” or “copyright infringement insurance,” consider first if coverage is appropriate for defense and/or enforcement.   Applications for the coverage can be made standing alone, or using supplemental applications to other existing general policies.   Simply going through the application process can help insureds better understand their IP exposures and prepare them to protect their positions.   By holding an IP defense policy an insured obtains peace of mind that they have the resources to respond effectively should their access to the marketplace be threatened by patent, trademark, or copyright allegations.

This article was first published on  IRMI.com  and is reproduced with permission.
Copyright 2024, International Risk Management Institute, Inc.

Footnotes

1. https://www.irmi.com/articles/expert-commentary/intellectual-property-matters

2. The Report of the Economic Survey , American Intellectual Property Law Association, 2023.

3. Business Owner’s Policy, Form SS 00 08 04 05

4. https://supreme.justia.com/cases/federal/us/572/545/
5. https://www.irmi.com/articles/expert-commentary/enforcement-insurance-for-intellectual-property-assets

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