The importance and value of intellectual property (“IP”) has increased with the rise of technology driven companies backed by innovation, whether they be proprietary or licensed rights. This is a rapid response to the changing dynamic of today’s economic landscape that sees intangible assets such as patents, trademarks, trade secrets, design rights and know-how comprising 90% of the value of S&P 500 companies in 20201. Research conducted by McKinsey Global Institute (“MGI”) further asserts that fast-growing companies invested 2.6 times more in intangible assets than their lower performing peers.2 It is therefore crucial that companies are able to adequately protect their interest in these intangible assets against ownership challenges and third-party liabilities. Below outlines 5 scenarios where standalone IP insurance can be of benefit.
1. Defensive Intellectual property infringement
An IP liability policy can be useful in covering the professional and legal expenses and fees of a company entering into litigation, arbitration, or a dispute, where they have been accused of IP infringement by a third party. The policy does not differentiate between competitors, companies in an entirely different market to the policyholders, or non-practising entities (NPEs) that are making the accusatory claim. The policy would also cover compensatory damages awarded by a court or costs arising from a settlement decision.
2. Contractual Indemnifications and customer obligations
Previously, it was much easier for companies to negotiate favourable contractual indemnities or to negate them entirely, but it is becoming increasingly difficult to do this. When these clauses are non-negotiable, they put the company in a position of accepting higher or unwanted risks. As a result, they are either self-insuring the risk or they are entering contracts that require them to buy professional indemnity or general liability policies to cover IP risk, especially patent and trade secret issues. In reality, most of these policies don’t offer those particular covers, leaving the IP exposure for the client and their supplier3. However, a dedicated IP insurance policy will extend the typical IP liability covers to the company’s contracted partners and cover any indemnities agreed by the company. The caveat is that the company would need to have control of the dispute resolution should a potential claim arise for their indemnified parties.
3. Protecting intangible assets from ownership challenges
When companies spend a large amount of their balance sheet on research and development (“R&D”), the IP created can offer both differentiation and enhance profits to the company. If a third party challenges a company’s ownership rights to their IP, the loss of the IP can also be a loss of great value to the company. There are IP insuring clauses that exist to help companies protect their IP rights from invalidation, rectification, cancelation, revocation or nullity proceedings, and indemnify them for any legal expenses suffered. In the negative event that the IP right is lost, business interruption or withdrawal costs can cover losses arising from injunctions against the use and sale of products associated with the IP right.
4. Reserving the right to pursue IP infringers
For start-ups and SMEs, it is important that they have the financial capacity to enforce their IP rights against third party infringers so that their IP rights are respected. The inability to enforce such rights can lead to loss of revenue and other commercial setbacks. Some IP insuring clauses are designed to cover the costs of pursuing third party infringers on the basis that there is a reasonable level of success, which is agreed between the company and the insurer. The policy will also cover any counterclaims made against the company following their initial pursuit claim.
5. Covering certain contractual breaches
A final use of an IP liability policy is for accidental contractual breaches of non-disclosure agreements or the use, sale or licensing of goods outside of their authorised territories, trade sectors, products groups or use provisions. Such unwitting breaches may be covered if the company demonstrates good faith and that they believed they no longer had such an obligation, further enforced by written legal advice.
Key Takeaways
- The rising value and importance of intangible assets such as IP requires an equal amount of investment into their protection
- IP liability insurance as a risk transfer mechanism can be incorporated into IP strategies to cover third party IP liabilities, contractual obligations and to protect core IP rights
- IP insurance can also cover business interruption costs and be used to mitigate further losses associated with this asset class
1 Ocean Tomo, A part of J.S.Held, Intangible Asset Market Value Study, 2020, accessed January, 2023
2 Hazan. E, Haskel. J, and Westlake. S, 2021, The Rise of Intangible Capitalism, found at: The Rise of Intangible Capitalism by Eric Hazan, Jonathan Haskel and Stian Westlake - Project Syndicate (project-syndicate.org), accessed January, 2023
3 Intellectual Property: The Unprotected Corporate Asset | Aon, accessed January, 2023