Patented Coverage

The specialized world of intellectual property insurance.
Patented Coverage

Intellectual property (IP) lawsuits have a tendency to be long and expensive. For a startup or a small business, the cost of being named in an IP lawsuit can be crippling. It can even mean bankruptcy.

Luckily, insurance is available to help cover the cost of litigation. It’s complicated, though: The cost of defending against litigation on some types of intellectual property may be covered under a business’s commercial general liability policies. But the cost of defending against an allegation of patent infringement is almost always specifically excluded from general policies. Special liability insurance is available to cover this eventuality.

But surprisingly, very few businesses take advantage of intellectual property insurance. Most companies don’t understand that their general liability policies can offer some protection, and many have never even heard of patent insurance. Why is this the case?

“There are a number of reasons,” says Alex Fjelstad, senior vice president of insurance agency Twin City Group in Minneapolis. “If the big companies, the Travelers and the Hartfords, are not in a market, then it isn’t well known, because it’s just not ubiquitous. And brokers are not comfortable advising their clients about these coverages, because they are so complicated and unique.” 

David Gauntlett, principal of insurance recovery law firm Gauntlett & Associates in Irvine, California (and author of a blog on IP and antitrust insurance), says it’s not in the interest of insurers to educate brokers that expensive IP litigation might be covered under general liability policies. “A lot of companies don’t know to look at this coverage [for IP cases],” he explains. “And the brokers who are typically advising them are not necessarily sensitized to think of the implications of this coverage, because if they have a question about what the policy means, they’ll go to the insurers, and the insurers will tell them, ‘Well, we think it’s very limited.’” 

Even intellectual property lawyers are sometimes ignorant when it comes to IP insurance. “They don’t use it as a resource when they plead into complaints,” Gauntlett says. “They don’t really factor it in at all. And there are a lot of missed opportunities because of that. It is a wonderful enhancement, especially in these tough times, to find somebody else to pay the bill.”

A Pertinent Policy

Most businesspeople think of commercial general liability (CGL) policies as covering only bodily injury or property damage, says Thomas Mielenhausen, attorney at Minneapolis law firm Lindquist & Vennum. In the past, CGL policies almost always included an additional coverage called advertising injury liability. The language was vague, but the gist of it was that policyholders would be covered in case other parties were injured by their promotional activities. 

In the 1980s and 1990s, courts began to interpret these advertising liability clauses to include various kinds of intellectual property infringement. By 2001, insurance companies had begun to respond by writing CGL policies so that they specifically excluded infringement of IP rights other than copyright, trade dress (the visual appearance of a product or packaging that is particular to a company), slogans, or use of another’s advertising idea. But since then, the courts—especially in Minnesota, which tends to be relatively lenient on this point—have found that many commercial general liability policies still cover various offenses related to advertising. The upshot is, depending on the way the individual policy is written, companies may find they have some IP insurance even if they haven’t gone out of their way to buy it. 

The 2009 case of General Casualty Company of Wisconsin v. Wozniak Travel, Inc., demonstrates how these policies may be applied. Wozniak, which had done business under the name Hobbit Travel for 30 years, was sued by the Saul Zaentz Company d/b/a Tolkien Enterprises, alleging trademark infringement for wrongful use of the word “hobbit” in its business name. While that suit was in progress, Mielenhausen represented Wozniak/Hobbit in its attempt to get its CGL insurer to cover the litigation costs. 

“As it turned out, the defense cost was the most important thing, because Hobbit Travel won [the trademark infringement case],” he says. “And I was able to get defense costs covered under their general liability policy.”

“Insurance companies are trying to shift the business model away from ‘occurrence’ to ‘claims made,’” Gauntlett explains. “‘Claims made’ means the claim needs to be made within the policy period. But ‘occurrence’ doesn’t care when the claim is made. It depends when the occurrence is. And in advertising injury coverage, the occurrence is when the offense happens, not when injury or damage results from it.” 

Wozniak’s policy had historically been written on a “claims made” basis, and the alleged injury had occurred ever since the company started doing business as Hobbit Travel. So the insurance company had to pay.

Unfortunately, in the case of this particular business, the lengthy litigation process took its toll: Hobbit Travel declared bankruptcy at the end of 2009. But other companies can still benefit from its experience. 

“Small companies should always, always go first to their commercial general liability policies,” Gauntlett says. “You can throw away your birth certificate, your wedding certificate, anything like that. They can be replaced. Never throw away your commercial general liability policies issued on an occurrence basis. Put them in a special place that you can always find them. They’re the most important asset a lot of companies have.” Gauntlett advises companies shopping for a CGL policy to buy a plain, inexpensive, bare-bones insurance service office policy. The more customized a liability policy is, the more likely it will have specific exclusions written into it that may affect IP litigation coverage. 

There is never any guarantee that intellectual property litigation will be covered under a general liability policy. But Christopher Larus, an attorney at Minneapolis law firm Robins Kaplan Miller & Ciresi, says you can’t know for sure until you talk to your attorney and examine the policy in light of the specific allegations of the complaint. “Whenever a suit is filed, it is worthwhile for the defendant to consult with its lawyer and its insurance broker to determine whether there’s a potential for coverage,” he says.

Filling the Insurance Gap 

There’s a reason insurance companies go out of their way to exclude patent litigation from CGL policies. “Patent risk is difficult to underwrite in many instances, because many times the purchaser of the insurance knows a lot more [about the technology and the industry] than the insurer,” explains Robert Fletcher, president of Kentucky-based patent insurance company Intellectual Property Insurance Services Corporation (IPISC). “You really have to have skills in patent law in order to determine how bad the risk is. In our case, for example, our underwriters are patent attorneys and PhDs who have patent agents’ licenses. We have an opportunity to search all of the existing in-force patents in the USPTO and elsewhere to determine whether or not the product is actually covered by a patent. It takes a skilled artisan.”

Fjelstad, who is IPISC’s agent in the Twin Cities, says there also isn’t enough data available for most insurers to develop rates they’d feel comfortable with. As a result, patent defense insurance is a specialty product and is priced accordingly. “It’s not inexpensive,” he says. “The cost of this coverage runs about one to two percent of the limit that you purchase. So that if you buy a $1 million limit, that’s anywhere from $10,000 to $20,000 a year.” 

He says the clients he works with typically have a couple of things in common. First, they are established, successful companies that have a product to protect. Second, they are in an industry that tends to experience a lot of intellectual property litigation, such as software. 

Smaller companies shouldn’t necessarily panic because they can’t afford this type of policy, Fjelstad says. “Typically, they’re not going to be a target, because the patent law allows basically for reimbursement of what the patent holder would have gotten had they been getting a licensing fee,” he points out. “So, for instance, if you’re only doing a couple hundred thousand dollars of sales, at the end of the day, your exposure in terms of damages is pretty minimal.”

Stephen Schaefer, principal and intellectual property attorney at Minneapolis law firm Fish & Richardson, PC, has worked in the “IP-centric” medical device area for 17 years. Despite this, he says he has never had a client that seriously considered buying insurance specifically to prosecute or defend patents. It’s just not part of that industry yet, he says; but it might be more prevalent in the retail world. 

“The only area where I can think IP-specific insurance may make sense is where you have a large retail [entity that is] acquiring product from a vendor who may not be around to indemnify the buyer if a charge of patent infringement were to arise later,” he says. 

Indeed, says Fletcher, almost all of the major retailers are beginning to require their suppliers to get patent defense insurance and to name the large retailer as an additional insured in the policy. “The Walmarts of the world are uncertain about the little guys’ ability to defend them,” he says. “This way, even if the little guy goes bankrupt, or is in the process of losing his shirt, the policy is there in full limits. The large retailer is covered regardless.” 

Normally, Larus says, when you supply products to a retailer, there are a bunch of implied warranties that go with it. One is that the products don’t infringe on anyone else’s intellectual property. The retailer is indemnified. 

“Nevertheless, when you’re a retailer buying goods from a vendor in another country, or a vendor that might not have a lot of money, your right to indemnity is only as good as the checkbook of the indemnitor,” he points out. “If they can’t cover it, then you’re on the hook. So retailers will make those terms even more explicit, and make it very clear that if they get sued for infringement, the vendor has to cover those costs.”

Hedging Your Bets

So far, we’ve been looking at intellectual property insurance from the liability point of view. But there is also insurance to help companies prosecute infringement cases. This type of policy, usually called abatement insurance or enforcement insurance, is relatively rare for two reasons. First, as Fletcher points out, the inventors and small companies that could benefit most from it can’t usually spare the money to pay for it. Second, larger firms often have other ways of enforcing their intellectual property rights.

“If you can’t afford to bring a lawsuit, you could always go to a law firm and say, ‘Would you take this on on a contingency?’ And a lot of times they’d be happy to do that,” Mielenhausen says. “Or you could go to your investors and say, ‘Would you fund this litigation?’ and in exchange, maybe give them a bump in their investment if it’s successful. So there are many ways that you can pursue that. That’s why you have to look carefully at whether that type of insurance is worth it for you.”

Small firms that can’t afford the premiums for full-on intellectual property liability insurance have other choices, too. Larus says some insurers offer policies that cover just the cost of litigation, not the cost of compensating any loss. IP litigation is so expensive that often litigation costs eat up all of a company’s IP insurance coverage anyway. And limiting the payout makes the insurance significantly cheaper. 

On the other hand, if a significant proportion of a small company’s value proposition is tied up in its intellectual property, the company may choose to buy a type of insurance called multi-peril, which covers the cost of recovering after a company loses an IP case. “Multi-peril is essentially a business interruption type of insurance,” Fletcher says. “It covers the loss of commercial advantage. It covers the cost of redesign, repair, reformation, remediation.” 

He says this type of insurance is also cheaper than regular IP liability insurance, since it doesn’t pay unless the case is decided against the policyholder. “If you have an intellectual property asset and it’s called into question, it can affect a lot of things,” Mielenhausen says. “It can affect your ability to sell, your ability to attract investors. This is just a recognition that it’s no different than if your business suffered a bad fire. That’s what insurance is: a way of managing the risks that any business faces in terms of its continuity and its revenue stream.”