IP insurance

In November 2012, the Licensing Executives Society (LES) Scotland held the aptly-titled event “IP Insurance – too complicated and too expensive – why bother?” which, unsurprisingly, covered the oft-overlooked topic of insurance for intangible assets. But in a market which is increasingly reliant upon intangible assets to boost value and add a competitive advantage, why does IP insurance have such a dearth of coverage in the mainstream commercial world?

In a staggeringly illustrative statistic, only 17% of value in S&P 500 companies was attributed to intangible assets in 1975; by 2010, this figure rose to a whopping 80%. Traditional insurance does not cover intellectual property rights (IPR), and cannot provide for a company’s IP risk management policy. However, the insurance industry has not managed to adapt at a parallel pace, and as a whole has been slow to adjust to the changing needs of its clientele. Even the UKIPO website, which claims to be able to “help you get the right type of protection for your creation or invention,” provides minimal information on what IP insurance is and where you can find it – and that’s if you even manage to locate the blurb on the site.

It’s a strange, if not altogether inexplicable, phenomenon. In 1975, insurers were vital to a business; it was easy to insure tangibles and ensure that companies could stay afloat following any unforeseen physical accident. However, insurance companies are now becoming more irrelevant to modern, IP-rich companies whose worth is tied up in assets that are much more difficult to value. Take Coca-Cola for example – it has consistently earned first place in Interbrand’s annual list of top 100 brands, and its formula is one of the most valuable trade secrets in the industry. And while Coca-Cola could easily pursue or defend any claims, what would happen to a smaller company if they were accused of infringing either of these major assets?

The traditional school of thought regarding IP protection used to be summed up in the following phrase: “the best insurance is a well-drafted patent.” The problem with this is twofold. The first and most obvious problem is that not all IP falls squarely within the category of registered IP assets, much less within the limited area of patents. The contemporary understanding of IP acknowledges a much broader range of assets; Metis Partners’ Metisology™ accounts for a number of these, know-how, organisational knowledge and trade secrets included. The second – and biggest – problem is that patents don’t pay for claims. And what is the value of a “policy” that doesn’t pay claims? Most would answer that with NIL.

Anecdotally, following a growing frustration at the increasing levels of IP infringement, inventor Michael Wilcox burned his patent in protest in March of 2012. He claimed that large companies were no longer concerned with seeking out licensing deals since they didn’t fear the consequences of appropriating these innovative products and processes for free. This, of course, is because SMEs are traditionally in a much weaker position to pursue or defend any infringement claim, and companies freely use this knowledge to their advantage in eliminating competitors from the market. But these SMEs can also become the unwitting perpetrators of IP infringement; as soon as a product is put into the market, there is an inherent risk that it may be infringing upon an already registered patent.

According to Erik Alsegard , the Senior IP Underwriter at Munich Re, if a company is not in a position to defend or pursue IP infringement, then the intangible value on their balance sheet is not even worth talking about. This inherent frustration with the system has been made clear in the ever-diminishing number of patents being filed in the UK, along with the steady incline in patent infringement claims; in the past year alone, filed patents have decreased from circa 21,000 to 15,000, whereas there have been over 2000 unique claims of patent infringement.

Aggravating the situation even further is the exorbitant price of IP litigation; we highlighted in a previous blog that, for the first time, more money had been spent on court fees than on innovation thanks to companies engaged in the headline-grabbing patent wars. But the mammoth costs of litigation aren’t limited to giant corporations like Apple and Samsung – the average cost to an SME defending an infringement claim can exceed the £1million mark, and in fact it is SMEs who are normally engaged in IP litigation.

So what happens when these cash-strapped SMEs are taken to court over potentially arbitrary infringement issues? Oftentimes, these start-ups will be forced to use venture capital and innovation investment funds in order to defend rather than innovate, which may not sit well with investors and dissuade them from providing the company with capital in the future. Also potentially damaging for a company’s reputation, in the case of a licencing contract for example, is the inability to pay for an indemnity clause – something which nearly 80% of businesses provide for in their contracts.

IP insurance – or rather, IP infringement insurance – is an appropriate safeguard against these potential pitfalls. It gives businesses the freedom to operate, especially in markets that have a high patent turnover rate or contain ‘hidden’ patents which are particularly difficult to find. It also gives businesses the option of deciding whether to take the risk of continuing to sell the possibly infringing products, or whether to recall them; the policy would provide for the losses (to a limit) in either case.

There is, of course, the potential for abuse of such a policy; a company may opt to sue for infringement or file an appeal, not on the basis of any hard evidence, but because they are in an economic position to do so. Nevertheless, a well-drafted IP insurance policy should ensure that any such claims are well-founded, and would ultimately ensure that crucial IP assets which underpin a company’s competitive advantage are well-protected. And that is why we should all bother.

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