A Primer on IP Insurance Options

IP Infringement Policies

In the last several years, a number of insurance companies including Chubb, AIG, InsureTrust (through Lloyd's of London), Venture Programs, Intellectual Property Risk Management (“IPRM”), and Litigation Risk Management, Inc. (“LRM”) have begun offering insurance that pays costs associated with infringement of patents only, or infringement of some combination or all of patents, trademarks, trade dress, copyrights and trade secrets. For purposes of this article we will refer to these polices as “IP infringement policies.” IP infringement policies vary by carrier and property covered. The following descriptions are necessarily general.

Scope of Coverage

IP infringement policies typically cover the costs of infringement arising from the use, distribution, sale, or advertising of the insured's products. Many exclude coverage for trade secret misappropriation. Most insure against liability for defense expenses (largely attorney and expert fees), including costs incurred defending injunction motions, damage awards, and settlement expenses. Each of these categories typically counts against the total amount of the coverage. Thus, the amount of the indemnity remaining to pay damages will be reduced by the cost of an unsuccessful defense. That fact is more important in the patent infringement context because patent infringement lawsuits tend to be more expensive than copyright and trademark infringement lawsuits.

IP infringement policies often are issued on a named peril basis. Coverage may not extend to willful infringements, claims based on a failure to pay royalties, criminal acts, or known prior infringements. However, infringements prior to the date of the policy may be covered if the insured pays for that additional coverage. Coverage typically is on a “claims made” or “claims made and reported basis.” For claims to be covered, they must be made, or both made and reported, within the policy period.

Covered Territory

The covered territory generally is limited to the United States, although in some cases the insured may extend the territory by endorsement.

Cost and Indemnity Limits

IP infringement insurance can be expensive. The cost may be as much as, if not more than, $3000 annually for each patent insured or upward of $40,000 a year per product line for those companies that offer coverage on that basis. Policy limits range from $100,000 to $50 million.

Special Considerations

IP infringement policies usually do not cover the costs of complying with an injunction or settlement promise to cease and desist. Typically, applications require detailed information about the legal compliance program the insured uses to guard against infringement, the applicant's past history of infringement, and the applicant's own patents. The answers to these questions can affect the cost and availability of coverage. The applicant also may be required to supply opinion letters regarding non-infringement.

A shortcoming of some IP infringement policies is that reimbursement to the insured may not be due until final disposition of a claim, which can eviscerate some of the value of obtaining patent infringement insurance if the insured's attorney is not willing to wait for payment. As with media liability policies, the insurer typically has the right to limit coverage to the amount of a proposed settlement plus expenses incurred prior to receipt of the offer, if the insured refuses to accept a settlement offer.

Internet Insurance Policies

In some ways, the widespread use of the Internet has not had a significant impact on intellectual property risks. Traditional legal principles have been adapted to most legal issues, including Internet-related intellectual property issues. For instance, intellectual property content providers on the Internet must address the same copyright and trademark concerns that multimedia providers previously have addressed. They must license the music and images they use, as well as clear their use of any names or likenesses. In addition, they cannot label their products in a confusing way.

There are, however, risks that are unique to the Internet. The Internet by its very nature is global. Thus, if a business is planning to disseminate intellectual property on the Internet, an insurance policy covering only the United States is inadequate; coverage must be worldwide. In addition, many businesses that traditionally have not been intellectual property users now maintain Web sites that may utilize intellectual property. Unaccustomed as they are to the use and protection of intellectual property, such businesses must learn to obtain licenses for the use of others' software, music, and visual materials on their Web sites. They may also need to obtain insurance.

A number of carriers, including the Chubb Insurance Group, AIG, Tech Shield (through AON), InsureTrust, Media/Professional Insurance Agency, and St. Paul Fire and Marine Insurance Company now offer “Internet insurance” or “cyber-risk” insurance policies to businesses that use the Internet, but that are not pure Internet businesses such as Internet service providers, hosts, or Web site developers.

Scope of Coverage

Internet insurance policies are designed to indemnify businesses with respect to liabilities and defense costs for intellectual property infringements and other wrongs, such as defamation, invasion of privacy, and unfair competition committed in connection with the display, transmission, or other use of material on the Internet. Some policies cover liability incurred as a result of improper deep linking or framing, but most do not. Such policies often specifically exclude coverage for patent infringement, trade secret misappropriation, false advertising, and claims for breach of contract or failure to pay royalties.

As with IP infringement policies, the enhanced portion of any damage award and any criminal penalties may be excluded from coverage, although some insurers will pay enhanced damages and even punitive damages when it is legal to do so. Policies also sometimes exclude coverage for any award of lost profits.

Typically, Internet insurance policies are “claims made” policies, meaning that coverage applies only to claims brought within the term of the policy, or “claims made and reported policies,” meaning that coverage applies only to claims both made against the insured and reported to the insurer during the policy period.

Some policies may be extended to cover distribution of materials by additional means such as printed copies and CD-ROMs. Internet insurance polices also may cover liability to third parties for things such as damages caused by the transmission of a virus, exchange of corrupted data, and unwitting participation in denial of service attacks.

Some Internet insurance policies provide that the insurer has the right and duty to defend lawsuits involving covered activities; others provide that the insurer has the right, but not the duty, to defend. The insurer may settle only with the consent of the insured, but may cap its liability at the amount rejected by the insured.

Coverage Territory

Coverage typically is, as it must be, worldwide.

Cost

Premiums range from $5000 to upward of $100,000 annually and vary widely according to the business and the scope of coverage actually obtained.

Practical Considerations

Because Internet insurance is so new, policies vary significantly and there is little case law interpreting their provisions. It remains to be seen how coverage disputes will be decided. Many of the insurers require policyholders to have their systems audited by independent technical experts and to have their systems reviewed periodically as a condition to granting coverage for damages caused by the transmission of a virus, exchange of corrupted data, and participation in denial of service attacks.

IPISC's Defense-Cost Only Insurance

Another risk management option available to intellectual property owners is defense cost reimbursement insurance, which is designed to cover only the costs of defending a patent infringement lawsuit. Defense cost reimbursement insurance is marketed as the solution for a company that knows it is in the right, but is concerned that it cannot afford to litigate against a bigger or more well financed adversary. The insurance is not widely available; the author knows of only one company that offers such a policy, IPISC.

The costs covered include attorney fees, expert fees, and other litigation expenses. IPISC does not reimburse the insured for any damages it may be required to pay if it loses the lawsuit, although such coverage may be added. Premiums for defense cost insurance can range from approximately $2500 to $20,000 a year for coverage limits of between $250,000 and $500,000. The application for this insurance requires the applicant to attach an opinion of non-infringement. The insured is required to supply a second opinion when it submits a claim.

IP Infringement Policies

In the last several years, a number of insurance companies including Chubb, AIG, InsureTrust (through Lloyd's of London), Venture Programs, Intellectual Property Risk Management (“IPRM”), and Litigation Risk Management, Inc. (“LRM”) have begun offering insurance that pays costs associated with infringement of patents only, or infringement of some combination or all of patents, trademarks, trade dress, copyrights and trade secrets. For purposes of this article we will refer to these polices as “IP infringement policies.” IP infringement policies vary by carrier and property covered. The following descriptions are necessarily general.

Scope of Coverage

IP infringement policies typically cover the costs of infringement arising from the use, distribution, sale, or advertising of the insured's products. Many exclude coverage for trade secret misappropriation. Most insure against liability for defense expenses (largely attorney and expert fees), including costs incurred defending injunction motions, damage awards, and settlement expenses. Each of these categories typically counts against the total amount of the coverage. Thus, the amount of the indemnity remaining to pay damages will be reduced by the cost of an unsuccessful defense. That fact is more important in the patent infringement context because patent infringement lawsuits tend to be more expensive than copyright and trademark infringement lawsuits.

IP infringement policies often are issued on a named peril basis. Coverage may not extend to willful infringements, claims based on a failure to pay royalties, criminal acts, or known prior infringements. However, infringements prior to the date of the policy may be covered if the insured pays for that additional coverage. Coverage typically is on a “claims made” or “claims made and reported basis.” For claims to be covered, they must be made, or both made and reported, within the policy period.

Covered Territory

The covered territory generally is limited to the United States, although in some cases the insured may extend the territory by endorsement.

Cost and Indemnity Limits

IP infringement insurance can be expensive. The cost may be as much as, if not more than, $3000 annually for each patent insured or upward of $40,000 a year per product line for those companies that offer coverage on that basis. Policy limits range from $100,000 to $50 million.

Special Considerations

IP infringement policies usually do not cover the costs of complying with an injunction or settlement promise to cease and desist. Typically, applications require detailed information about the legal compliance program the insured uses to guard against infringement, the applicant's past history of infringement, and the applicant's own patents. The answers to these questions can affect the cost and availability of coverage. The applicant also may be required to supply opinion letters regarding non-infringement.

A shortcoming of some IP infringement policies is that reimbursement to the insured may not be due until final disposition of a claim, which can eviscerate some of the value of obtaining patent infringement insurance if the insured's attorney is not willing to wait for payment. As with media liability policies, the insurer typically has the right to limit coverage to the amount of a proposed settlement plus expenses incurred prior to receipt of the offer, if the insured refuses to accept a settlement offer.

Internet Insurance Policies

In some ways, the widespread use of the Internet has not had a significant impact on intellectual property risks. Traditional legal principles have been adapted to most legal issues, including Internet-related intellectual property issues. For instance, intellectual property content providers on the Internet must address the same copyright and trademark concerns that multimedia providers previously have addressed. They must license the music and images they use, as well as clear their use of any names or likenesses. In addition, they cannot label their products in a confusing way.

There are, however, risks that are unique to the Internet. The Internet by its very nature is global. Thus, if a business is planning to disseminate intellectual property on the Internet, an insurance policy covering only the United States is inadequate; coverage must be worldwide. In addition, many businesses that traditionally have not been intellectual property users now maintain Web sites that may utilize intellectual property. Unaccustomed as they are to the use and protection of intellectual property, such businesses must learn to obtain licenses for the use of others' software, music, and visual materials on their Web sites. They may also need to obtain insurance.

A number of carriers, including the Chubb Insurance Group, AIG, Tech Shield (through AON), InsureTrust, Media/Professional Insurance Agency, and St. Paul Fire and Marine Insurance Company now offer “Internet insurance” or “cyber-risk” insurance policies to businesses that use the Internet, but that are not pure Internet businesses such as Internet service providers, hosts, or Web site developers.

Scope of Coverage

Internet insurance policies are designed to indemnify businesses with respect to liabilities and defense costs for intellectual property infringements and other wrongs, such as defamation, invasion of privacy, and unfair competition committed in connection with the display, transmission, or other use of material on the Internet. Some policies cover liability incurred as a result of improper deep linking or framing, but most do not. Such policies often specifically exclude coverage for patent infringement, trade secret misappropriation, false advertising, and claims for breach of contract or failure to pay royalties.

As with IP infringement policies, the enhanced portion of any damage award and any criminal penalties may be excluded from coverage, although some insurers will pay enhanced damages and even punitive damages when it is legal to do so. Policies also sometimes exclude coverage for any award of lost profits.

Typically, Internet insurance policies are “claims made” policies, meaning that coverage applies only to claims brought within the term of the policy, or “claims made and reported policies,” meaning that coverage applies only to claims both made against the insured and reported to the insurer during the policy period.

Some policies may be extended to cover distribution of materials by additional means such as printed copies and CD-ROMs. Internet insurance polices also may cover liability to third parties for things such as damages caused by the transmission of a virus, exchange of corrupted data, and unwitting participation in denial of service attacks.

Some Internet insurance policies provide that the insurer has the right and duty to defend lawsuits involving covered activities; others provide that the insurer has the right, but not the duty, to defend. The insurer may settle only with the consent of the insured, but may cap its liability at the amount rejected by the insured.

Coverage Territory

Coverage typically is, as it must be, worldwide.

Cost

Premiums range from $5000 to upward of $100,000 annually and vary widely according to the business and the scope of coverage actually obtained.

Practical Considerations

Because Internet insurance is so new, policies vary significantly and there is little case law interpreting their provisions. It remains to be seen how coverage disputes will be decided. Many of the insurers require policyholders to have their systems audited by independent technical experts and to have their systems reviewed periodically as a condition to granting coverage for damages caused by the transmission of a virus, exchange of corrupted data, and participation in denial of service attacks.

IPISC's Defense-Cost Only Insurance

Another risk management option available to intellectual property owners is defense cost reimbursement insurance, which is designed to cover only the costs of defending a patent infringement lawsuit. Defense cost reimbursement insurance is marketed as the solution for a company that knows it is in the right, but is concerned that it cannot afford to litigate against a bigger or more well financed adversary. The insurance is not widely available; the author knows of only one company that offers such a policy, IPISC.

The costs covered include attorney fees, expert fees, and other litigation expenses. IPISC does not reimburse the insured for any damages it may be required to pay if it loses the lawsuit, although such coverage may be added. Premiums for defense cost insurance can range from approximately $2500 to $20,000 a year for coverage limits of between $250,000 and $500,000. The application for this insurance requires the applicant to attach an opinion of non-infringement. The insured is required to supply a second opinion when it submits a claim.