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Intellectual property risk and insurance

21st February 2014

What is Intellectual Property?

“Intangible” assets (“IA”) include Intellectual Property (”IP”), which covers a diverse range of  legally protected rights such as patents, copyrights, trademarks, trade secrets, designs and other forms of intangibles such as human capital, contract rights and goodwill. In our increasingly knowledge-based economy, intangible assets have economic and strategic importance just like tangible assets such as property and stock.

What are the Intellectual Property risks?

From the traditional risk management perspective, IP risk can be categorised as both a first party and third party risk.  From the first party IP ownership perspective, some of the potentially insurable risks include:

– The legal costs of protecting and enforcing your IP rights

– The loss or diminished value of these rights as assets per se, or diminished licensing or product revenues as a result of legal findings of invalidity, unenforceability, non infringement and challenges to title or ownership

– From the third party patent infringement liability perspective, some of the potentially insurable risks include:

– The legal costs to defend against allegations that your products or services are infringing the IP rights held by a third party

– Any resulting settlement or damages paid to a third party for past infringement of the third party’s Patent

– IP infringement indemnification obligations to indemnities such as distributors, customers and licensees

– The costs associated in recalling products that are found to have infringed third party IP rights


From a first party direct or consequential loss perspective, the following may also be insurable:

– Design-around costs to avoid infringement of a third party’s patent

– Compensation due to a contractually indemnified party following a product recall

– Lost revenue due to an injunction imposed as a remedy for infringing a third party’s patent


To illustrate several of these IP risks, let’s look at the example of a medical device company. It has a small but valuable portfolio of IP rights, including patents, trade marks and copyright (software). It also utilises certain third party technology under licence to complete some of their product range. Whilst profitable, as a relatively small entity by contrast to others in the global medical devices field, it faces a number of risks, namely:


Enforcement – having spent a great deal of time in developing its unique technology and exploring many blind alleys, a competitor can easily copy the device and severely undercut the sales price, having had the benefit of no R&D spend, which will hamper the cash flow of the business. With competition so great in this market a large entity may consider the commercial risk of the ability and willingness for a small entity to fight to protect its rights.

Defence – even though the company have spent an incredible amount on R&D and had specialist patent attorneys draft and file patents, there is always the risk that a third party may suggest that they have claims in their patents that are infringed by our medical device company’s products. Failure to defend such an action would result in the inability to sell the product. The substantial costs of such a defence often result in many businesses licensing rights to a competitor and taking only a fraction of the spoils in a particular territory.

Invalidity – a competitor filed for revocation of our medical device company’s patents in the European Patent Office and requested a re-examination of the patents in the United States Patent and Trademark Office in an attempt to destroy or restrict the scope of patents that were “blocking” their sales of a competing product. This could restrict the development of licensees for our client as there will be a question mark over the patents and whether royalties will be due or not. If the defence is lost the patents may be completely destroyed and the licensee and competitor can make or use the technology free of charge. This process is much the same as the planning process and building consent in the tangible property world – it can be taken away or rights of way granted.

Contract – in order to access key territories and meet the demand for the product, our medical device company licensed various distributors and manufacturers. Through these agreements they control the ownership of the their rights, determine sales prices, royalties, the ownership of moulds and certain “know how”. Apart from the risk that they may need to deal with contractual disputes with these parties, they have also provided indemnities in the event that the distributor or manufacturer is sued for infringing the IP rights of a third party.

In almost every IP dispute the legal costs are measured in tens of thousands of pounds, and often this will actually be hundreds of thousands. In the case of patents in the USA companies should generally budget for about £1.5m-£2m.

Is insurance the answer?

Insurance is not the only IP risk management strategy but it can be a key IP risk management tool. The global IP market is on the increase and is expected to grow into a large, mainstream line of coverage, much as has happened with Directors and Officers (D&O), Errors and Omissions (E&O) and Product Liability coverage.

The scope of coverage available on a global basis is limited when compared to other classes of insurance but the good news is that the UK is leading the world in development of solutions, especially from the Lloyd’s market. For example, some markets require that the applicant obtains a ‘freedom to operate’ opinion from an attorney and then the cover is built around the terms of the opinion. This can be very expensive and have many restrictions in the policy. The UK market providers generally undertake their own due diligence and provide full coverage for products, processes or services sold or used by the applicant. More recent policies cover indemnities given to suppliers and licensees, a very valuable extension for the technology and life science communities. Territorial coverage can be arranged worldwide and policy terms are typically one year.  Because insurers recognise that IP litigation, particularly patent litigation, requires special training and experience, policyholders are frequently allowed to select their own IP counsel in the event of a claim.  The excess and/or co-insurance (if applicable) will usually vary depending upon the type of IP rights at issue and the jurisdiction involved.

How can insurance help?

IP insurance can be used for balance sheet protection, contractual liability protection and deal facilitation.

Generally speaking, stand-alone intellectual property insurance is available for infringement liability,enforcement, representations (reps) and warranties and first party loss or impaired value type risks. Lloyd’s has been underwriting IP risk since the early 1980s and some of its member syndicates are the most experienced global risk insurers.

Types, terms and triggers

As described more specifically below, types of patent insurance include infringement liability, enforcement (also known as offensive or abatement), reps and warranties, first party loss or impaired value, loss of revenue and revenue loss due to an injunction.  These coverages are sometimes bundled as multi-peril policies.

First party offensive or enforcement coverage reimburses approved litigation expenses incurred by the policyholder in enforcing IP rights against infringers.

Third party defensive infringement liability coverage pays legal expenses and/or damages and settlement associated with IP infringement claims brought against the policyholder.

Reps and warranties coverage pays legal expenses, damages and settlement associated with the breach of IP related reps and warranties made in the context of a transaction such as a sale of a business, products, technology or IP rights themselves. Covered reps and warranties can include title, infringement and validity/enforceability.

First party loss of value or revenue coverage generally protects the insured from patent or trade mark value impairment, loss of licensing revenue or covered product revenue as a result of invalidity or unenforceability of the patent or trade mark or some government action that takes away a product’s IP protection and therefore decreases product revenue. It can also cover lost product revenue due to imposition of an injunction against a company for patent or trade mark infringement.

Policy forms vary but are often written on an aggregate limit of indemnity basis rather than any one claim, using claims-made forms as opposed to occurrence forms. This means that for there to be coverage the claim must be made during the policy period. Extended reporting periods can typically be purchased for an additional premium.


What may not be covered?

Fraudulent, wilful, dishonest or criminal acts are generally excluded, as are damages resulting from such acts. The cost of going forward licences are generally not covered (this would be where a licence agreement is made to settle a dispute and either a one-time payment is made for ongoing use of the IP (fully paid up) or ongoing royalty is agreed. There may be a number of exclusions relating to which products will be covered, which aspects of the products will be covered and whether claims relating to certain specifically identified patents or companies will be covered. Certain related causes of action, counterclaims and declaratory judgement actions may also be excluded.



The patent insurance submission process is not standardised.  However, generally speaking, the steps in the placement process are as follows:

– Submit completed indication form or at least sufficient information in order for the insurance provider to indicate whether they are interested in receiving a submission.

– Receive indication from the provider as to whether they are interested; the indication may also provide premium and limit of indemnity ranges.

– Provide detailed submission/presentation via a completed proposal form with information about the company and what the company seeks to insure, as well as requested exposures to be covered and limits. Some insurers require legal opinions and patent searches and some insurers require payment of an underwriting fee.

– Allow the provider to conduct its due diligence and underwriting analysis. (This is similar to having a survey on commercial property before insurers terms are provided).

– Receive terms and conditions from the underwriter.



Premium rating varies considerably depending upon the types of IP risk to be insured, the dynamics of the market the applicant operates in and geographical coverage etc. In recent times we have seen improved rating for SME’s with patent enforcement cover available from as little as £1,000. On average, cover ranges from £5,000 to £50,000 for £250,000 – £2m of cover. Typical price deflators/inflators are: amount of risk the applicant is willing to retain, co-insurance percentage, applicant’s industry, length of time insured products/technology have been on the market, size of the company, number of products or patents to be insured, claims history, market dynamics, strength of applicant’s patents.


How to use patent insurance

IP insurance can be used strategically for balance sheet protection, contractual liability protection and deal facilitation. Typical scenarios include the following:

– Negotiation of contracts such as licences, distributor agreements, OEM agreements and joint development agreements where patent infringement liability indemnification is an issue or patent insurance is required

– In M&A transactions where the purchaser is looking for protection from potential patent exposures

– In M&A transactions where the seller is looking for relief from burdensome reps and warranties, escrow or indemnification requirements

– Company is rolling out a new product line or entering a new geographic market


For a no obligation insurance review and to find out more about how we may be able to help you please call Horner Blakey Insurance Brokers on 020 7929 0108

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