How Pandemic, Contracts Focus Intellectual Property Insurance on Intangible Assets

The demand for intellectual property (IP) cover has been increasing year on year as businesses become more aware of the threat not only to their own IP, but also the potential that they may face a claim of infringement by another company.

It seems that agents, brokers and insurers have experienced a surge in enquiries from U.S. companies over recent months, the drivers of which appear to be two-fold.

COVID-19

Firstly, the global pandemic has not only forced many companies to adopt new ways of going about their day-to-day business, but it has also forced many to reassess the importance of their intangible assets. While it’s a well established fact that intangible assets have become an increasingly important factor on a company’s balance sheet with regard to its overall value, having to lock-up their premises and move to a work-from-home environment has served as a wake-up call for many that these intangible exposures need the same level of protection previously afforded their bricks and mortar.

In many ways, COVID-19 has accelerated a trend that was already well underway with the shift from tangible business models such as manufacturing to intangible business models such as selling or licensing IP rights and technologies. Those companies who hadn’t perhaps realized the value of the IP within their business — whether it’s within their brand, their creativity or their products and services — are now looking at how they can protect it in this new environment and for some, it will not be just through registering patents, trademarks or copyright.

The second driver is maybe a little less obvious. For many companies nowadays, affirmative exposures arise in their obligations under contracts. This is impacting many lines of insurance, and is no different for IP insurance.

Contractual indemnity

Contractual terms and conditions relating to IP infringement used to prevail only in contracts where IP infringement was a particular concern. But now IP infringement terms and conditions are being applied, especially by larger corporates, as standard in all their contracts with other companies. This means they are now being seen in contracts for products and services that are not highly exposed to IP infringement allegations such as construction contracts, events management contracts, management consulting, professional training and even contracts for plumbing services.

Contracts containing strict indemnities relating to IP are being pushed harder and with monetary uncertainty. Particularly in the current economic climate, firms are looking to outsource this risk. These contracts not only have indemnity language but insurance is now being listed as a requirement to cover this indemnity — and with limit of indemnity requirements being set at as much as $5 million or higher, this is more than most small to medium sized companies can manage so they need to offset the risk.

Litigation

What will always make IP challenging is the fact that claims are almost always managed outside the public domain. Managing negotiations and settlements out of court hides the reality of IP risk. However, as clients realize the importance of their IP, we are likely to see the rise of litigation. Indeed, according to patent litigation data provider Cipher.ai, Q2 in 2020 was the busiest quarter for U.S. patent infringement court filings, both made by operating companies and non-practicing entities (sometimes known as patent trolls), in over three years, which might indicate the start of a new contentious period.

Businesses increasingly want to enforce their IP and maintain their market share, and at the same time there is continual need to defend their IP against competitors and patent trolls. It’s not uncommon to see litigation that has no real merit but is started as a strategic move to bring forward a licensing deal or to even remove the other party from the market.

Small and medium sized companies are unlikely to have their own legal departments ready and waiting for a lawsuit to land, but that doesn’t make them powerless to protecting themselves.

IP Insurance

So how do companies source this protection? Many are unaware that their traditional insurance policies do not provide adequate coverage and those that are, don’t know how to bridge this gap. The first step should be through their broker — but unfortunately this is where they may encounter a problem.

Historically, arranging IP insurance has been a time consuming and expensive process and without traction for brokers. As a result, many have switched off and moved on to focus on more profitable lines despite their clients requirements. However, while IP may appear complicated to arrange on the surface, it doesn’t have to be. It’s important that brokers remember that it is just another type of insurance and their clients have a real need for the valuable protection that it provides.

The good news is that while IP insurance remains a small market, it has adapted. Quotations by some markets can be provided on the same day and with no upfront fees to pay. Clear and broad coverage is also now available so this, combined with an efficient and effective service, makes it a far simpler process for brokers to find the right level of protection for their clients. They just need to ask clients about those contractual indemnities or even more simply just whether they hold any IP.

The truth is that IP insurance is sector-agnostic. Most businesses, of most sizes, in most industries will have an intellectual property risk whether they realize this or not and their risk in intangible assets is rising. Brokers do need to recognize their need and remember that IP cover is really just another type of insurance — all it takes to bridge the gap is to start the conversation with their clients.

This viewpoint was originally published in the August 24, 2020 issue of Insurance Journal Magazine.

Topics Agencies Property COVID-19