CEOs, Insurers Finally Ready to Embrace Intellectual Property Insurance?

The small yet complicated niche of patent and intellectual property (IP) insurance has seen more interest lately as patent claims rise and companies look to protect their ideas or company trade secrets from so-called patent trolls and infringement lawsuits.

While IP insurance is becoming more important, the insurance market has had a hard time accepting this risk, although that could be starting to change, say experts.

CEOs report managing their intellectual property as one of their top three risks because they have begun to recognize it is one of their most valuable assets, says Sarah Benolken, executive vice president and global tech/media/telecom practice leader for Willis.

The insurance industry and the agents and brokers working with these companies now need to respond. “There is a big shift happening in this market, more products and more competition are coming,” she says.

Though they may not realize it, almost all companies from small to mid-size to large have an IP risk and need IP insurance to protect their market share and deter exuberant or frivolous charges, especially in light of the current IP trends, says Robert Fletcher, president of Intellectual Property Insurance Services Corp. (IPISC).

According to IPISC, IP lawsuits filed in the U.S. have trended upward dramatically with 5,189 patent actions recorded in 2012 — the highest number ever and an increase of 29 percent over 2011.

There has also been a worsening in infringement allegations from patent assertion entities (PAEs) or “patent trolls.” These entities sue companies for the sole purpose of extracting licensing fees.

“IP remains an important part, if not the most important part, of a company’s value,” says Fletcher. “IP is everywhere. It’s in product packaging by way of design patents and trade dress; recipes by way of trade secrets and utility patents; and advertisements and marketing protected by copyrights.”

IP insurance availability, on the other hand, has stayed static. IPISC, a Lloyd’s coverholder, is just one of a handful of insurance agencies that will work with this risk in the U.S. The company has provided IP insurance since 1990, including abatement insurance, defense insurance; multi-peril IP insurance rider and unauthorized disclosure insurance.

Last fall, IPISIC launched its InventPro program to help enforce a policyholder’s rights against infringers who may be larger and more financially able to withstand costly IP litigation. The policy targets inventors and small companies that have one to three patent applications, issued patents, trademark applications and/or registered trademarks.

IPISC said it plans to announce a new coverage specifically targeting “patent troll” accusations or infringement within a year.

Global-broker Willis has also focused on the niche for the past five years, but Karl Pedersen, senior vice president of Willis’ FINEX North America Cyber and E&O team, says it has been a struggle to bring underwriters around, something the broker is trying to change.

“There are a lot of limitations built into the amount of coverage or the type of industry, and most companies don’t have that baseline for insurability,” he says. “We are trying to say ‘why aren’t there other markets writing IP coverage? Why are there so many cyber markets out there but only a few for patents?'”

Willis brokers believe one reason is there hasn’t been historical data available to U.S. insurers. The broker has worked on addressing that with its PatentWize product that it launched back in 2010. PatentWize works through a partnership with online IP business intelligence software platform Innography to help companies manage their patent risks by providing patent, trademark, legal, financial and other key IP information.

The software combines dozens of patent, trademark and business data sources from more than 70 countries to assist companies with their IP analysis and research.

PatentWize is part of Willis’ IP offering that also includes technology, consulting and risk transfer options. The broker is also working on building additional tools and partnerships around the intellectual property risk, as well as providing more specific tools for larger companies.

“This space really has a perception vs. reality problem. The perception is you can never make money writing patent insurance. Willis doesn’t believe that mantra. You can manage IP just as much as you can manage tangible properties,” says Pedersen.

Insurers aren’t the only piece of the IP puzzle that has needed prodding. It has been a struggle to engage customers as well.

“It has taken some time to get the message out because people don’t have a finite understanding of intangible assets,” says Pedersen. “People are very comfortable with property and tangible assets, but when it comes to the fact that 60 percent of a company’s assets are intangible — including IP — companies don’t know what they should be doing.”

IPISC has also found it difficult to educate insureds on why they need a specific IP policy. Many clients will turn to their commercial general liability (CGL) policies for IP coverage, says Fletcher, but most insurers exclude any coverage for IP. Patents are also frequently excluded.

“Any coverage for IP under a CGL policy is extremely rare and explicitly limited to the cases where advertising injury involves the patent claims directly covering the act of advertising itself. Otherwise, a defense insurance policy specific to cover IP risk is the only viable solution,” says Fletcher.

As always, the burden to get the message out falls on the insurance industry. Fletcher says agents and brokers need to be proactive in assessing their clients IP risk, explaining to clients what that IP risk is and the significant exposures it creates, and advising clients on insurance options.

“An important part of this challenge is to educate the market that prices, limits and restrictions are continuously becoming more favorable to insureds,” he says.