Proactive Risk Management of Intellectual Property: Crucial to the Insurance Professional’s E&O

Now more than ever, the insurance professional’s ability to create a proactive risk management plan for clients is crucial to success. Insurance professionals handle many types of insurance policies. In fact, checklists are often used to not only ensure that each exposure relevant or important to the company is carefully vetted; such lists are also quite simply used to protect the professional’s own, as well as the company’s, errors and omissions (E&O) exposure.

Yet insurance professionals are routinely missing the opportunity (and the responsibility) to ensure that their clients are fully protected when it comes to intellectual property (IP) risks. Many times they are unaware that IP exposure can be one of the biggest threats to a company’s survival.

On average, it is more probable that a company will be involved in patent litigation than in a shareholder dispute, which triggers a director’s and officer’s (D&O) claim.

Despite the fact that IP insurance may seem complex, there is an obligation to talk to companies about this important risk. Having expert knowledge in IP insurance is not required; however, ensuring clients are adequately covered for IP risk definitely is required. Failure to accurately grasp a basic understanding of a company’s IP risk and offer a real solution to allay this extraordinary exposure can be detrimental to a company, and potentially expose the insurance professionals’ E&O.

Matter of Time

Gene Quinn, president and founder of IPWatchdog Inc. email that, “It is only a matter of time before technology-based businesses, regardless of size, will find themselves facing a patent infringement issue.” He went on to say that, “some businesses would prefer to pretend that patent infringement is not a problem for them and they won’t be sued.” (See “What to Do if You Are Sued for Patent Infringement,” June 2, 2011, Gene Quinn, http://www.ipwatch

No longer can insurance professionals allow companies to bury their heads in the sand when it comes to identifying and managing their IP exposure, especially because the number of patent lawsuits filed in the United States has trended upward over the past 20 years, from 914 patent cases filed in 1990 to 3,531 filed in 2010.

Not only are patent lawsuits frequent, they are also time consuming, many times taking up to five years to settle or be decided. Patent lawsuits can also be incredibly expensive. According to most recent American Intellectual Property Law Association survey, the average cost to litigate a patent lawsuit in a U.S. court when the amount being disputed is between $1 million and $25 million dollars is $2.8 million dollars. Damages over and above attorney fees average close to $9 million, as reported in a recent patent litigation study, “The Continued Evolution of Patent Damages Law,” (PriceWaterhouseCoopers, 2010).

As insurance advisors, you cannot assume that your clients are aware of the potentially catastrophic consequences should they become involved in patent litigation. Most companies do not have millions of dollars set aside, nor do they have access to such amounts, in the unfortunate event they are sued for patent litigation.

Most companies are not readily able to secure a loan through a bank, collateral-free and interest-free, to fund their IP litigation. And forget about an attorney taking a patent case on contingency. Unless the potential damages are at least in the tens of millions of dollars, a company would have a tough time finding an attorney to take on representation.

IP Infringement Coverage

Intellectual property infringement insurance is the most logical and economic choice that a company can make to ensure that the means are available to take on an IP infringement case. IP insurance enables companies to get through the lawsuit based solely on the merits, not the depth of their pockets. IP insurance is just as valuable, and in many instances more valuable, than general liability, errors and omissions, and director’s and officer’s insurance policies.

Although IP policies are routinely offered and placed by insurance professionals, IP insurance is many times altogether inadvertently overlooked or purposefully avoided during risk management consultations.

Jim Francis, an experienced IP litigator in Lexington, Ky., champions IP insurance as follows: “No matter how valid a client’s position or how skilled the attorney, the success of any disputed matter is necessarily dependent on the client’s willingness and ability to pay for the cost of adequately preparing and positioning their case for a favorable resolution. When a case is built on a strong foundation, risk is minimized and the matter becomes more likely to be resolved early, favorably and in a manner that is less adversarial. Given the current economic climate, companies are understandably more reluctant than ever to litigate and more willing to accept infringement as simply part of the cost of doing business.

“When companies are forced into litigation, their very survival is often at stake. Their lack of a war chest for funding litigation can force them to minimize litigation costs to the point that they undermine preparation and are forced to negotiate from a point of weakness rather than strength.”

Francis added:

“Specific intellectual property coverage can even the playing field and afford the smaller litigant the opportunity to defend their intellectual property rights and force a more favorable resolution than would otherwise be possible against a larger adversary.

“It can also provide an economic advantage to the litigant of equal or larger size relative to its adversary and allow it to more easily litigate from a position of strength.

“Without insurance coverage, efforts to minimize litigation costs can become a higher priority than adequately preparing the matter for an early and/or favorable resolution,” he added.

As an insurance professional, it is your responsibility to have at least the knowledge of and an elementary understanding of IP risk and the availability of insurance products designed to fund the high cost and consequences of IP litigation. It is also important to talk to an IP insurance expert about this most valuable coverage.

Intellectual Property Insurance Products