Physical property damage due to natural disasters, weather-related or man-made incidents, can be relatively straightforward to assess, but understanding how a different form of property causes damage can be a little more ambiguous, according to panelists at the recent Professional Liability Underwriting Society’s 2017 Directors and Officers (D&O) Symposium in New York.
Intellectual property claims are some of the highest severity claims seen in the private D&O space, but understanding insurance coverage in this area can be a challenge, according to the panelists, who discussed exposures in the private sector and emerging trends in D&O.
“Private Directors and Officers Liability coverage is really broad, and that’s always a challenge for us as brokers trying to sell something that doesn’t say, ‘When the building burns down, it’s covered,'” said David Lewison, national financial services practice co-leader at AmWINS Brokerage Group. “The lack of specifics in these forms can lead to unintended coverage for things like intellectual property claims.”
This is because intellectual property claims can arise out of a multitude of situations, panelists said.
An intellectual property claim is very hard because it’s an idea, so it’s difficult to prove that someone has or hasn’t had the same idea as someone else.
“The biggest dollar amount for us that I see still revolves around claims involving intellectual property — or ‘You stole my people; you stole my stuff,’ claims, as one of my colleagues calls them,” said panelist Mark Kohler, second vice president at Travelers Bond & Specialty Insurance. “We’re seeing claims arising out of business contracts gone awry. Claims can arise when one competing insured hires someone, and the person brings their contacts with them. So, the old employer sues the new employer saying those contacts and trade secrets may cause an unfair advantage in the marketplace.”
Another area of intellectual property that can be challenging from an underwriting standpoint because of its broad scope is false advertising, according to panelist Bertrand Spunberg, the executive risks practice leader at Hiscox.
“Those consumer-action type claims involve the entire distribution chain from the manufacturer to the retailer,” he said. “To underwrite them is very complicated.”
Spunberg gave an example of one ex-seafood manufacturer that was found to be selling 5.5 ounce tuna containers instead of the six ounces it advertised.
“Everybody got dragged into it — the manufacturer, distributer and retailer,” he said. “How to start evaluating that exposure is very challenging.”
What can make it even more difficult is how intellectual property claims are covered by insurance, panelists added. “If it’s an allegation of any wrongful act, it’s probably covered unless it’s excluded,” said Lewison. “Policies don’t always address it, and sometimes they are deliberately ambiguous on certain things.”
Panelist Erin McGinn, vice president and claims manager for the Private Commercial Claims Unit of XL Professional Insurance, agreed with Lewison’s perspective. “There are too many holes,” she said. “Too many gray areas.”
That said, litigation costs of defending an intellectual property claim can add up quickly.
“Given that there are no physical assets, intellectual property is less defined in terms of value, so the value can be elevated,” Will Grein, senior vice president of the Private/Not-for-Profit Management Liability Division at Allied World.
“Intellectual property litigation routinely costs between a few hundred thousand dollars and several million dollars in costs and attorney’s fees in addition to any damages awarded.”
McGinn said one big driver of the severity of intellectual property claims is fees. This is because the more time it takes to defend a matter means higher fees for the insured.
“There are three themes I see — embedded, emboldened, aggressive plaintiffs, overly optimistic defense counsels and personal vendettas,” she said. “Those three things will drive fees and severity of claims.”
The best way to avoid high severity intellectual property claims, Grein said, is to mitigate risk from the outset. Directors and officers should ask lots of questions of incoming employees and work with counsel to make sure any new hires are not breaching prior non-compete agreements or bringing over any intellectual capital that belongs to their previous firm, he stated. It is also important to confirm whether employees have signed non-compete agreements and ensure the stipulations in those agreements are appropriate given the industry they operate in.
“Most policies exclude coverage for the entity and only provide coverage for individuals,” he said. “Standalone intellectual property coverage exists in the market but is very specialized with large retentions and premiums.”
He encourages insureds to seek advice from a broker who can assess the risk and determine whether their policy has additional exclusionary language relative to intellectual property.
It is equally important to vet new ideas posed by anyone within the company, said Tim Finch, commercial D&O underwriter at ArgoGlobal.
“An intellectual property claim is very hard because it’s an idea, so it’s difficult to prove that someone has or hasn’t had the same idea as someone else,” he said.
Finch said he worked with one company in which new ideas were first sent to a legal team for approval.
“What this company did was take the person who had the idea out of the loop until the lawyers and the information technology (IT) team had looked at the idea quite deeply and checked that it hadn’t been done already,” he said. “That separation of someone who had the idea from someone who deals with the legal side of it seems to be a very good practice.”
Role of Carriers
Insurance carriers can work to mitigate intellectual property claims for insureds on the front-end, which can also help set carriers apart in a competitive environment.
“It is a competitive environment, and everybody is after the same thing,” Spunberg said. “You have to think about how to help your clients by being more than an insurance carrier. It’s great to have a carrier that pays your claim, but not having a claim is better. The disruption generated by litigation is tremendous, and helping insureds not have losses to begin with is important.”
Spunberg said the way different carriers approach this strategy will determine how successful they are in today’s environment.
“How do you make sure you set yourself up to identify flags that are red enough?” he said.
Having a good relationship and open dialogue between the carrier and the insured is a good place to start, particularly because private companies tend to be less transparent than public companies, Lewison said.
“It’s important to have a good relationship,” he said. “There can be other factors that come into play outside of what the contract says, so an open dialogue is important. You have to say, ‘It is vague and not always abundantly clear, so let’s make sure we do the right thing.'”
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