A Guide to Patent Defense Insurance (AKA Intellectual Property Insurance)

08/15/2016 01:41 pm ET

There are three major areas of coverage that encompass patent defense insurance (also known as intellectual property insurance): infringement defense, abatement coverage, and patent trolls defense. Aside from patents, intellectual property insurance can also provide coverage for trademarks and copyrights.

The first coverage, infringement defense, applies when a claim asserts that you have taken someone else’s intellectual property. This coverage will provide an attorney and cover the legal costs to defend you; it will also provide possible judgment/settlement, if applicable.

The second area of coverage under Patent defense insurance is abatement coverage. If you have a legitimate claim against someone who is taking your intellectual property, the insurance company will cover the legal expense to pursue it. They will only do this, however, if they feel you have a strong claim.

The last area of coverage is patent trolls defense. Generally, patent trolls, or non-practicing entities, are entities that rely primarily or exclusively on the enforcement of their patent rights to generate revenue. Patent trolls often have no operations other than initiating litigation against, or seeking licenses from, potential infringers. The majority of cases submitted to patent defense insurance are due to patent trolls; therefore, many insurers will have exclusions for these types of claims.

There are a few insurers, however, that cover patent trolls exclusively. Many technology companies prefer to only purchase patent troll coverage, as they feel this is their biggest exposure. Note: Apps are patent trolls’ biggest targets; companies with successful apps should definitely pursue this type of patent defense insurance.

Other aspects of patent defense insurance are deductibles (which are usually $25,000 or higher), cost, and coinsurance. The policyholder pays the deductible prior to the insurance company’s contribution toward coverage. Further, coinsurance requires the client to pay a percentage (usually 10%) of the claim, after the deductible. The theory behind coinsurance is that it keeps the client engaged in the case, as they have “skin in the game.”

The price of patent defense insurance is usually 2% to 4% of the maximum limit. Meaning, if you buy coverage with a $1 million limit, the price is $20,000 to $40,000. Current pricing is trending more toward the 2% level, or $20,000 for a $1 million limit.

$10 million limits are easily attainable for patent defense insurance. Higher limits are available, but a significant enterprise must be seeking the coverage. Insurance companies will not insure a business for more than it is worth.

Patent defense insurance policies also contain hammer clauses. A hammer clause states that if the case can be settled for a specific dollar amount, the policyholder refuses the settlement, the case loses, and the judgment is greater than the amount it could have been settled for, you pay the difference. With a hammer clause policy, clients who want to pursue litigation do so at their own peril.

Choice of legal counsel is another factor for this coverage. Most insurers have a panel, which is a list of expert intellectual property attorneys who are contracted to work for a prescribed fee. We have found panel attorneys to be very competent; of course, insurance companies do not want to lose money, so they contract with the best attorneys possible.

However, now there is one insurer which offers the choice to use your own attorney, and will pay their prevailing rate. This is a great feature, as policyholders can use their current intellectual property attorneys, instead of being represented by an unknown.

Until recently, the patent defense insurance market was very limited. The main offering was an insurer which required a substantial fee just to get a quote; this, of course, discouraged many clients from pursuing coverage. Today, you do not have to pay a fee in order to get a quote for coverage. Any firm that has intellectual property with significant value should consider patent defense insurance.

HCP National has access to the entire marketplace for patent defense insurance (intellectual property insurance), and for over 20 years, has provided all forms of E&O, D&O, cyber breach, and tech E&O insurance. For more information on patent defense insurance (intellectual property insurance), click here.

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