Insurance coverage

Intellectual Property Insurance Coverage: Seven Tips Every Buyer of Defensive IP Coverage Should Know

Intellectual property (IP) insurance coverage is having a moment. The post-pandemic economic recovery has been driven to a large extent by tech startups.1 For a new technology company, strong intellectual property can provide both a competitive advantage and a fundraising advantage. Without the ability to protect this intellectual property, the benefit is limited. However, effective and appropriate insurance coverage can both preserve the company’s intellectual property and provide its own basis for company exception and exclusivity.

Not all intellectual property is equal. Neither does IP coverage. Intellectual property insurance policies are handwritten, which means that coverage is not written on uniform state-approved forms, but with unique terms and provisions that may vary from policy to policy. other. Intellectual property coverage can be (1) defensive; (2) offensive; (3) contingent; or (4) a variation of these three. At a very basic level, defensive intellectual property coverage will defend and indemnify the insured against lawsuits alleging infringement, which may include coverage for affirmative inter partes (IPR) review proceedings challenging the validity of the patent(s) of the plaintiff and/or satisfying the claims of the indemnified. involved in litigation regarding the insured’s licensed intellectual property. Offensive IP insurance will cover the insured’s enforcement of their own intellectual property, such as affirmative infringement claims against an unlicensed third party. Conditional IP coverage is like other litigation insurance because it seeks to manage existing litigation risk by protecting the insured against catastrophic loss in an ongoing IP case. Other variations of these covers may include residual value insurance, which protects the value of intellectual property assets pledged as collateral for secured loans, or trade secret value insurance, which protects the value of trade secrets in the event of misappropriation.

Litigation risk for IP-intensive businesses can be substantial. Attorney fees, expert fees, and other costs in patent infringement litigation can consume a substantial portion of the value of the intellectual property at stake.2 And the ultimate damage involved can be catastrophic.3 Due to the high cost of litigation, defensive IP coverage is, by far, the most prolific IP insurance product available on the market. For companies that have never purchased defensive IP coverage or for companies in the process of renewal, here are seven key terms to consider:

  • Cover trigger and notice. The trigger for coverage is the event described in the policy that must occur before the insured is required to give notice and the insurer is required to begin paying to defend the insured or an indemnified party. Some policies will state that the triggering event is a “claim” or “demand” for compensation made by a third party during the policy period. Other policy wordings may include claims and demands, but also a request for a license or other circumstances that objectively or subjectively are likely to give rise to a future claim or litigation. While individual considerations may vary, while the right “circumstance” may warrant hiring an attorney to preemptively investigate and defend against a potential infringement claim, many policyholders will prefer a more inclusive coverage trigger, rather than a wait for a specific request before hedging accepts. At the same time, policyholders choosing the broader cover trigger will also need to ensure that timely notice is provided in response to such circumstances and not just in the event of a specific “claim”. In either case, policyholders should carefully review and familiarize themselves with the terms defining the trigger for coverage and notification obligations before and after purchasing a defensive IP insurance policy.
  • Related Claims Provisions. Similar to other “claims made” coverage, some PI insurance provisions, including those built into professional or media liability policies, provide that all “claims” arising out of a common set of facts and circumstances are deemed to be a single claim made for the first time when the first of the claims has been made. Such provisions may be intended by policyholders to prevent a situation in which multiple policies apply to a single claim. But in the hands of an adjuster, these provisions can be manipulated to avoid coverage. For example, a lawsuit in the first year, involving bodily injury resulting from a defect in a patented product or an allegation of misrepresentation in a disclosure regarding the intellectual property of policyholders, could jeopardize coverage. of a patent infringement action involving the same intellectual property during the second year. — unless the “related claims” provision of the Intellectual Property Policy is restricted. To avoid a situation where failure to notify a non-intellectual property dispute under an intellectual property dispute insurance policy results in a potential loss of coverage, the “related claims” provisions must be formulated in such a way as to group together only claims alleging that the insured has committed an offense against a third party. -the intellectual property of the party.
  • Defense costs and IPR proceedings. A policyholder, who purchases defensive IP insurance, can reasonably expect the policy to cover the cost of defending against claims that the insured infringes the patent, copyright, trademark or any other intellectual property of a third party. But what if the “defense” against an allegation of patent infringement involves challenging the validity of the third-party plaintiff’s patent in an IPR proceeding? Will the initiation and affirmative pursuit of an IPR proceeding by the insured be considered defensive or outside the scope of policy coverage? Brokers, risk managers and advisers who advise an insured on the purchase of intellectual property cover should carefully review the terms of the policy to ensure that the cost of pursuing an IPR or Other “affirmative” actions taken to defend against allegations of intellectual property infringement, including counterclaims or third party actions, are not excluded from coverage. Policyholders should also avoid, where possible, exclusions that would prevent coverage of counterclaims or cross-claims initiated by an insured in the defense of an otherwise covered intellectual property dispute.
  • Violation Withdrawal Fee. Defensive PI insurance policies generally insure “loss,” including defense costs and amounts payable to a third-party plaintiff as damages to satisfy a judgment or settlement. But beyond the compensation of a plaintiff or an indemnified party, an insured found liable for an infringement may also incur substantial expenses to bring itself into compliance, in particular by withdrawing any counterfeit product from the market. These costs may include transportation, labor, warehousing, labeling and public relations. To avoid potential disputes over whether these expenses qualify as “damages”, persons considering purchasing IP coverage who are exposed to this risk should review the terms of a potential policy in light of the violation withdrawal fee coverage.
  • Fee awards. Depending on the nature of the Intellectual Property Claim against the Insured, the Plaintiff/Plaintiff may be entitled to recover attorneys’ fees, costs or other expenses from the Insured. For the reasons stated above, these fees can be substantial. Prospective purchasers of IP insurance coverage should review policies to confirm that coverage is extended for the awarding of fees or costs by an adversary, particularly where the policy otherwise deals with the recovery of fees and expenses. costs of the insured in subrogation.
  • Exclusions of contractual liability. The intellectual property risk to potential defendants and insureds exists on at least two levels. For example, a non-practising entity may bring a lawsuit for patent, copyright or trademark infringement against a practicing policyholder without establishing a legal relationship or other relationship between the plaintiff and the defendant. Alternatively, a licensee may, by exceeding the constraints of a limited license, incur both legal and contractual liability to a licensor. An insured may also engage his liability by a contractual promise to indemnify a licensee accused of infringement by a third party. Despite the potential overlap between infringement and contractual liability, some IP insurance policies include exclusions intended to eliminate coverage for any claim arising out of any breach, repudiation, termination or suspension of any written contract, license or other agreement by the insured . When evaluating terms of coverage, insureds should carefully review contractual liability exclusions (1) to avoid potential conflicts with express coverage of liability to indemnified parties; and (2) to be consistent with the intention of the parties to provide coverage for liability for patent infringement, even when framed in terms of breach of contract.
  • Misconduct Exclusions. Like regular D&O policies, many defensive IP insurance policies include exclusions for claims (1) arising out of an action or license application caused or contributed to by actual or alleged dishonesty, conduct fraudulent, malicious or criminal act of the insured; and/or (2) arising from the fact that the Insured has obtained a profit or advantage to which the Insured is not legally entitled. While these types of exclusions may be appropriate for a traditional D&O policy, such terms have no place in an IP insurance policy as they conflict with and potentially eviscerate coverage for infringement claims. which necessarily require as evidence evidence that the defendant the insured engaged in unauthorized acts of infringement. At a minimum, the policyholder must insist on exceptions, also typical of D&O insurance, for the defense of claims otherwise covered and requiring a final and final determination of the excluded conduct.

No insurance policy is perfect. Nor will policyholders always agree on every policy improvement or change requested by an insured. But by focusing on the above conditions, policyholders will have the ability to maximize defensive IP insurance coverage in the event of a material underlying infringement litigation.