All businesses insure their major physical assets as a matter of course. This standard form of risk management ensures that a business can survive damage to its assets by fire, by theft or by other accident. Many manufacturing businesses will also have specialist insurance for, for example, product recall or consequential loss arising from the interruption of business.

Few standard insurance policies protect businesses from loss or damage to their intellectual property. However, a growing range of policies aimed specifically at intellectual property is available and businesses would do well to consider whether such a policy is available that is right for them.

What Protection?

A policy should offer protection in a wide range of circumstances. A policy should allow a business to defend any claim on or legal proceedings brought in relation to any use of its intellectual property rights such as an application to declare a patent invalid or an application by a competitor for a declaration of non-infringement of a trade mark. It should also extend to the right to defend claims in respect of alleged breaches of patent belonging to a third party or the alleged infringement of the copyright of a third party. Even an action by a third party alleging passing off (i.e. the allegation that a business is seeking to mislead the public by making its product appear to be that of a third party) can be defended under the terms of some policies.

The aim of an intellectual property insurance policy is to ensure that any claim or legal proceedings brought against a business in relation to intellectual property which directly threaten the right of that business in its intellectual property, can be defended.

It is important that an insurance policy also allows the business to pursue claims against third parties whose actions infringe their intellectual property rights. This would entitle a business to challenge any infringement of its own patent or of its copyright or design rights. It would entitle a business to protect its trade mark and to prevent third parties from passing off activities (i.e. trading in such way as to mislead the public into thinking that a product or services emanate from the third party). Unfair competition allegations may also be defended and pursued where they relate to trade marks.

The scope of individual policies will vary. A policy should, however, cover the costs of legal action and the costs of any damages award that may be made by a court as a result of legal action.

Audit

In order to obtain benefit from an intellectual property insurance policy a business will have to undergo a thorough audit to ensure that it has identified all of the intellectual property rights that need to be protected. Intellectual property insurance policies depend upon a very thorough declaration of the rights that are to be protected. Breaches of rights which have not been identified and declared to the insurer will probably not be protected. The process of auditing the intellectual property rights of an existing business may be expensive. However, whether or not insurance is to be obtained, it is an exercise which any business should consider undertaking. It is surprising to find businesses whose very existence depends on, for example, the integrity of its intellectual property portfolio or its licence arrangements which are unable to demonstrate easily that everything is as it should be.

An audit of intellectual property rights provides the basis of a declaration to an insurance company. The assistance of a patent agent and, perhaps, a solicitor will be necessary to show the nature of the rights that are to be covered by a policy. The costs of carrying out the audit, even if carried out specifically at the direction of an insurance company, will be borne by the business.

Scope of Protection

Insurance policies tend to be conservative in their scope. Experience suggests that it is difficult, for example, to obtain cover for copyright breaches. Where a specific document or computer programme is declared then cover may be obtained. However, where a business which wishes simply to protect itself in a general way against future breaches of copyright (of material which has, perhaps, not yet been brought into existence) then cover is not easily obtained. We have also found that it is difficult to obtain cover where it is possible that a technical infringement of copyright has taken place but where it is extremely unlikely that any action will be brought by a third party. It is interesting to compare this approach by insurance companies with the willingness to insure, in the case of property transactions, against action for breaches of restrictive covenant where it is considered extremely unlikely that any third party will bring an action for a breach. At the moment our experience is that insurance companies will not offer cover for known infringements.

Policies will not usually cover causes, disputes or events which occurred prior to the commencement of the policy where a business knew or ought to have known about them. This emphasises the need for a thorough audit before seeking to put a policy in place.

Who should get cover?

It is clear that intellectual property protection policies should be considered by all businesses whose assets include intellectual property rights. However, arranging those policies may be time consuming and costly and a business must ensure that it obtains cover that addresses its business needs. Where a business is in its early stages and, perhaps, seeking to attract venture capital funding, there are certain policies available which may be very suitable. For a relatively modest price a broad range of cover is available which will allow the business to pursue or defend attacks on its intellectual property rights. The existence of such an insurance policy may provide reassurance to funders in the early stages of the businesses. In fact, intellectual property rights infringement actions are unlikely to occur during, say, the first three years of a business since it is unlikely that its product will have reached the market. This relatively modest commercial risk is not expensive to insure and, since it requires an audit of intellectual property rights, may be a sound business move. The audit itself shows a commercial rigour that will appeal to funders. The willingness to insure demonstrates a prudence that can only reassure funders.

No Cover: the consequence

What if a business is attacked through the courts and has no intellectual property rights insurance? Where a court action is commenced there is a wide portfolio of legal expenses insurance now available which may be worth considering. Some of these policies are ‘after the event’ policies. They are designed to allow a business to pursue or defend a court action and are capable of covering intellectual property rights actions. Premiums are high and the risk assessment that is carried out before insurance is offered may, in itself, be expensive. However, for a fixed sum of, perhaps, 30% of the total potential legal costs, a business can fight on where, otherwise, it would be forced to capitulate and, perhaps, lose the lynchpin of its business.

How it works in practice

The Legal expenses insurance market is evolving all the time. Some interesting products allow those insured to pay a premium only if they win. This means that an unsuccessful legal action carries no financial penalty at all. A successful legal action, which brings with it financial benefit involves payment of a part of that benefit to the insurance company. The courts approach to legal expenses insurance is also changing all the time.

Under the recent Civil Procedure Rules after-the-event legal expenses insurance is a cost which is recoverable by a successful litigant from its opponent, provided the premium is reasonable. In contrast, pre-event legal expenses insurance remains, as it has always been, irrecoverable. A precondition of any recovery is that the litigant must, under the Civil Procedure Rules, give notice of after-the-event insurance to its opponent. However, there is no requirement to give details of the cost of the insurance.

Legal expenses insurance is only available where the business has a good chance of success in a legal action. The assessment of the merits of the claim before insurance is offered would be very thorough. It will provide a business with a very clear picture of the wisdom of continuing with an action and, although it will have costs associated with it, that risk assessment will help a business to avoid high risk and ill fated disputes.

Conclusion

Intellectual property insurance (and legal expenses insurance) are tools available to any business when seeking to ameliorate commercial risk. Neither is a substitute for sound commercial appraisal of risk. However, the simple decision to seek insurance in relation to intellectual property rights may prompt the sort of audit that will illuminate for a business the fact of its dependence on intellectual property rights. It will help the business to introduce strategies and procedures that will, inherently, offer the business protection against the very breaches or infringements against which it seeks to insure. Insurance is a way of spreading the risk a little further and preventing a business from being brought to its knees by the hostile activities of a competitor and may well be an appropriate additional string to the bow.

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The opinions expressed in the articles published in this section do not necessarily reflect those of Pharmalicensing or UTEK Corporation. No actions including proposals to or agreements with other companies should be taken by any reader without obtaining specific business or legal advice. Neither the publisher nor the authors accept any liability for any actions or activities undertaken by any reader or other third party as a consequence of these articles or for any errors or omissions therein.