Why You Need to Consider IP Insurance.
Virtually every single business has intellectual property of one form or another, whether this is exclusive knowledge or data or simply a company name or logo. It is now estimated that up to 80% of company value is made up of intangible assets. According to the UK IP Office, in 2011, the UK market sector invested £ 137billion in intangible assets and rights compared to just £ 90billion invested in tangibles. So, there has been a significant shift in recent decades in the relative values of a company’s assets.
Yet, whilst virtually every business will insure their buildings, contents, stock etc from fire and flood, how many companies insure their intangible assets ? It is estimated that only half of the IP investment in the UK is protected by IP rights. Of these rights, less than 10% are protected by insurance.
Here are some reasons to consider insuring your IP rights, whether registered or not:
Exposure to Risk
Whether your business is involved in retailing, licensing, manufacturing, distributing, R&D or any other form of trading, you run the risk of an exposure to potential breaches of another’s intellectual property rights. Similarly, you could find another company infringing upon your own intellectual property and may wish to assert your rights against them.
If third parties are aware that you have insurance backing, they are less likely to infringe your rights in the knowledge that you have the capability to pursue the matter in the courts. This is particularly so when the third party is a large organisation who often take the view that smaller companies cannot run the risk of massive legal costs in pursuing their allegations.
It is estimated that the average cost of running a patent litigation through to receiving court judgement in the UK is £ 750,000. Insurance will provide you with the financial capacity to fend off allegations of infringement or to pursue your own allegations against others.
Many trading contracts invariably carry a requirement for you to indemnify your contracting party for infringement of a third party’s rights. Insurance can meet that indemnification provision.
The IP Insurance Market.
The Lloyd’s and London insurance market has provided IP protection for over 30 years. In the early years, cover was provided under conventional Legal Expenses policies and restricted to the Legal Defence costs of defending an allegation of IP infringement. The basic insurance principle of “the premiums of the many will fund the claims of the few” largely failed as very few Companies purchased IP insurance and claims costs were high, leading to very high premiums and few purchasing insurance coverage. Even today, despite the increasing value of IP held within almost every companyin the UK and worldwide, very few actually protect that IP through insurance.
IP insurance remains a specialist cover offered by less than a dozen insurers. However, in recent years, the type, flexibility and breadth of insurance coverage has improved significantly as the insurance market tries to attract clients and be more responsive to their actual risk and insurance needs. Business Interruption and cover for R&D costs is a good example of this expansion of coverage that is now available through a few insurers.
At the same time, minimum premiums have reduced in a bid to attract the entrepreneurial start-ups/University spin-outs etc who have a clear need for protection but have often decided that the purchase of insurance is too expensive given their limited funds.
It is possible to insure against a single item of IP, a family of IPR or an entire portfolio. The IP does not need to be a registered right, it can be brand or trade secret. Usually, it is an IP family or selected IPR that are insured – those that the Insured consider to be most at risk or valuable. For start-up or early stage companies, it is often the funders (angel or venture cap) that will insist upon the purchase of insurance as a condition of their finance.
In view of the nature of an IP dispute which is usually both protracted and expensive in terms of legal costs, this is reflected in the terms that are typically put forward by insurers. Whilst the policy wordings have broadened and improved, insurers will expect the insured to carry a significant self-insured retention themselves. This takes the form of a policy excess (typically 5% of the indemnity limit) and /or a co-insurance clause (often 10%) whereby the insured then bears a percentage of any claims costs.
In terms of the geographical limits of the cover that is available, these can be worldwide. As a rule, insurers will categorise the geographical coverage into UK only, Europe, Worldwide excluding North America and then Worldwide. Not surprisingly, if cover is needed in North America then this has a significant impact upon the premium, and sometimes policy excess, given the litigious nature of that part of the world.
How To Obtain an IP Quotation
It is relatively easy to obtain a quotation for IP insurance and can be achieved in a matter of a couple of days.
Firstly, decide what items of IP you wish to insure, whether these be registered or unregistered IP. For example, do you want to protect a single patent, a patent family, the entire portfolio etc ? Once this has been identified, many insurers and brokers have access to IP risk assessment researchers who will then investigate the activity in that particular IP arena around the world and will provide a report as to competition, past litigation and other activity in and around the IP concerned.
Where non registered IP is concerned, it is important to be as specific as possible as to which IP is to be covered. As this IP is not registered, details as to how the IP is stored, kept secret and with whom it is shared needs to be disclosed so that Insurers can have comfort around its secrecy and non disclosure. Insurers will then undertake similar research as mentioned above to ascertain the level of IP and activity within that arena.
If there are any licenses, for use, sale, production etc of the IP and any milestone or royalty income, then Insurers will ask for sight of these contract conditions.
This is all that is required in order for a premium quotation, or at least a premium indication to be obtained. The quotation will then stipulate any additional information or detail that may be required, including completed Proposal Form, prior to policy inception.
Legal Defence Cover
This is usually the starting point in terms of the minimum level of cover considered by clients (although there are “opinion only” covers available, we are not aware of any being purchased). These Legal Defence policies will indemnify you, the policyholder for your legal costs in defending an alleged infringement action from a Third Party. The policy will also indemnify you for any court awards that may be made against you.
Within the UK insurance market, there is capacity to purchase upto £ 100m indemnity with further capacity available overseas. However, generally, an insured will purchase a maximum of £ 2m – £ 5m indemnity owing to the fact that they will often negotiate with the claimant and settle prior to the matter going to Court.
- A defensive cover giving peace of mind to Policy-Holders in the event of unforeseen infringement
- Variable cost to suit needs and expectations regarding risk of occurrence
- Instalment options available on terms
- Confidence in being able to engage with experienced professional advisers to resist or manage the claim
- Simple and easy to incept through Anthony Jones Insurance, professionals in IP risk protection
- Provides assurance on project funding where the IP is a key component
- A tactical advantage to the Insured in being able to notify cover to contending parties and their advisers often leading to weakened resolve
Pursuit & Enforcement Cover
This policy covers the legal costs of pursuing a Third Party that is alleged to have infringed upon the Insured’s IPR. The maximum Indemnity limits are far lower than for Defence cover for two reasons; a) this cover is for the legal costs only, not damages, and b) the existence of this IP insurance cover will often lead the Third Party to negotiate with the Insured, recognising that there is the financial ability to pursue the matter to its ultimate conclusion if necessary. Maximum indemnity is usually circa £ 5m.
If the Insured has IP in an area which may be difficult to identify because it is contained deep within other intellectual or tangible property, it can sometimes be very difficult for the Insured to know whether a Third Party is breaching their IP. For such circumstances, the Insured can purchase cover for “Discovery Costs”. These are costs that are incurred to identify and ascertain whether a Third Party has been breaching the Insured’s IP. For example, if the IP is a component within the inner workings of an engine, the Discovery Costs cover will indemnify the costs of dismantling an engine and its subsequent rebuild to establish if there was a breach of the IP.
- A pursuit policy giving confidence to Policy Holders and strengthening their arm in negotiating settlement
- The benefit of additional pro-active extra cover that helps root out possible misuse and saves time and trouble used in combination with court proceedings or otherwise and deflects early term costs
- Instalment options available on terms
- Confidence in being able to engage with experienced professional advisers from an early stage to pursue and resolve any claim
- Provides assurance on project funding where IP is a key component
Both Pursuit and Defence, including Legal costs and Damages Awards
This is an amalgam of the two previous policies, providing both Defence and Pursuit coverage. For those companies that consider that they have a genuine financial exposure to IP defence and pursuit, this is a policy that gives them comfort for either eventuality, ensuring that clients can survive when an IP damages award is made against them, as well as enabling them to bring an IP action against a competitor.
- More rounded protection, particularly valuable if IP is at the “cutting edge”.
- Goes some way to relieving potential insolvency if infringement established
- Major improvements to bottom line can be achieved
- Cash-Flow can be improved by using the financial support available
Breach of Agreements
Agreements can comprise any license, confidentiality, non disclosure, marketing or other agreement which controls the exploitation of declared and insured intellectual property. This can cover both the pursuit by the Insured and also the defence of an action against the Insured for an alleged breach of a contractual Agreement. This cover can include non- payment of milestones and royalties. If Agreements cover is purchased, then the Insured will need to specify or declare to the insurer the Agreements to be insured.
If there are likely to be a number of new Agreements negotiated by the Insured on a regular basis, then insurers will often provide automatic cover for these new Agreements, subject to declaration. This means that insurers will make it a condition on the policy that the Insured make a periodic declaration of all new Agreements and IP, typically every 3 or 6 months, so that insurers can evaluate the changing risk and charge an appropriate adjustment of premium.
- Provides some assurance against consequences of breach of often complex agreements
- Delivers swift relief by obtaining access to specialist advisers to achieve resolution
- Assists Cash Flow by resort to policy support
Business Interruption and R&D Costs
Many start-up firms have their whole business plan dependent upon realising the commercial value of their IP. This often involves extensive funding to invest in premises, machinery, marketing etc to bring their IP to the market. So, there is considerable up-front financing required to develop and commercialise the IP.
Then, there is also the projected income derived from the commercialisation. This income could take the form of revenues from sales, licensing income, royalties or milestone payments.
Both the initial financing outlay and the projected revenue income figures can be very substantial. Any allegation of IP infringement, court injunction and court awards can quickly have major impact on the financial viability of the business. This scenario is also true for established firms that are seeking major investment and development of new IP.
It is possible to insure both the historic and committed R&D expenditure as well as insure the future Income that will be derived from the IP.
This type of policy seeks to indemnify the insured for their loss of incurred / committed development costs and also their future income following a successful claim for infringement of IPR brought by a Third Party. Where the Courts adjudge that the insured has infringed another’s IPR or that the insured’s IP is invalid, leading to an injunction, then insurers will indemnify the Insured’s loss.
The losses can be both incurred and committed research and development costs and also loss of future income had the court injunction not been applied.
As one might expect, the sums at risk here can be substantial and this is also reflected in the typical premium levels and excesses applied.
- Gives major assurance to start-up entities and funders with costly R&D
- Gives assurance and security during the development phases
- Can insure future revenue stream
- Enhances value of the business
After-the-Event (“ATE”) Insurance and Litigation Funding
This option may be available for clients who have not purchased IP cover or have purchased the “Opinion Only” Policy, and have a case with good prospects of success. The Insured will, however, require a case where there are good (usually a minimum of 60%) prospects of success. Additionally, the damages that they are seeking must be high enough to allow for the risks which the insurer, or litigation funder, will take. For these reasons, the premium cost of After the Event (ATE) insurance is relatively high with insurers sometimes charging upto 40% of the damages being sought.
- No need for insurance to be purchased at the outset or prior to a potential loss.
- If a sizeable potential claim and a good chance of success, then you can obtain insurance for your legal costs in the even that your legal case proves unsuccessful.
- ATE insurance can enable an insured to obtain Litigation Funding inf they are unable to pay their legal fees on an ongoing basis.
M Stevenson, Director.