Insuring Products of the Mind

The rapid growth in patent infringement litigation in 2013 – almost 6,500 cases, or an increase of 25 percent over 2012, according to PricewaterhouseCoopers – might appear to be a strong motivator for at-risk businesses to buy intellectual property insurance. But the complicated world of IP and the insurance market that covers this unique class has yet to overcome long-standing barriers to buying, the experts say. That’s not to say opportunity doesn’t exist in this niche.

“One of these days this market is going to break,” says Richard Betterley, president of Betterley Risk Consultants, an independent consulting firm specializing in risk management that publishes The Betterley Report.

The question is when – not if, he says.

Betterley is not alone in that assessment.

“This market has been really tough [but] it should be huge,” says Graeme Newman, director, CFC Underwriting. Intellectual property insurance should be a mainstream product, he says.

There have been energetic attempts to grow the intellectual property insurance market. But so far, those attempts have not created much market expansion. Only a handful of IP coverage sources exist today. According to The Betterley Report’s “Intellectual Property and Media Liability Insurance Market Survey 2014,” only four carriers play in the IP space, some more than others: AIG, Liberty Mutual, Lloyd’s (via Intellectual Property Insurance Services and SAMIAN) and ThinkRisk (Aspen).

But Betterley, and other IP market experts believe it’s only a matter of time.

Everybody’s at risk when it comes to intellectual property exposures, says CFC’s Newman. CFC Underwriting, based in London, is a Lloyd’s managing general agency specializing in insurance products for specific niche markets.

Everybody has some form of intellectual property and everybody risks infringing on others’ intellectual property, Newman says. “This should be a huge global market.”

Small Market Still

The lack of market growth can be traced in part to challenges insurers have with underwriting IP risks profitably, the experts say.

The complexity of defining intellectual property is a challenge to insurers, according to Robert Fletcher, president of Intellectual Property Insurance Services Corp. (IPISC), and the originator of the first-ever intellectual property infringement abatement policy.

“If you go back and you look at history, we have been insuring products of the hands – homeowner’s, and fire, automobile, even perhaps health insurance – all of that is not difficult to define,” Fletcher says. “But when you get into ‘products of the mind’ – patent, copyright, trademark, trade dress and trade secret coverages – you are talking about something that’s more difficult to define.”

That ambiguity causes people to ask, “Well, what is it you really want to have insured?”

And that’s a big challenge, he says.

That challenge isn’t helped by the lack of industry expertise in the field of insuring intellectual property, according to CFC’s Newman.

“The insurance market has been battling for decades with how to write this coverage effectively,” he says. The market hasn’t grown because there are so few people with the right level of experience to underwrite the class. “That’s been a real inhibitor.”

Betterley says that few agents and brokers have invested time needed to learn about IP exposures and how to cover them.

“Brokers don’t really understand the topic or coverage; therefore it’s very difficult for the prospective buyer to feel confident that, yes, this is something I should buy,” Betterley says.

Patent Trolls

There is another reason insureds choose not to buy: it’s often easier for defendants to simply pay-off “patent trolls” than it is to fight them.

“Patent trolls,” or Patent Assertion Entities (PAEs) and Non Practicing Entities (NPEs), are firms that own patents but do not make products from them. While there are differences between the two, both are sometimes referred to as “patent trolls” because they are seen as exploiting technological advances that make it difficult to establish boundaries for patents and they use aggressive litigation tactics against target companies, such as threatening to sue for patent infringement without specific evidence.

In June 2013, the Obama Administration reported that suits brought by PAEs had tripled in the previous two years and the costs from litigation grew to almost $13 billion. More than 100,000 companies were sued by PAEs in 2012 alone, according to the “Patent Assertion and U.S. Innovation” report, published by the Office of the President.

“It’s an odd combination where the insureds think on the one hand, ‘I’m never going to have a problem so why do I need the insurance,'” Betterley says. “On the other hand it happens so frequently, ‘I’ll just write a check and make the non-practicing entity claims go away; it’s cheaper than having the insurance company involved,’ which doesn’t make sense.”

IP Products

Despite the IP market’s current small scale, there is continued interest from underwriters.

One new patent insurance product, offered by Corona Underwriting, which represents the west coast offices of CRC, insures against the costs of NPE litigation.

RPX Patent Infringement Liability Insurance reimburses legal costs and some settlement costs incurred by operating companies in litigations initiated by most NPEs. The base policy provides limits of up to $5 million annually to cover litigation costs incurred to defend against patent infringement suits brought by NPEs in U.S. federal district court (International Trade Commission actions are excluded from the coverage, as are intellectual property indemnification obligations). The policy also can cover costs associated with re-examinations and declaratory judgments. Each policy carries a self-insured retention between $50,000 and $500,000. Policyholders must be members of the RPX client network.

According to Garrett Koehn, president of the northwest offices of CRC, the purpose of the coverage is to make patent risk a “reasonable and predictable line item” in a company’s budget, whereas today, the risk is “highly” unpredictable.

“The thought here is that through the combined efforts of Corona Underwriting and RPX, this new patent risk service now available to the mainstream insurance market may become as widely accepted as D&O or cyber liability insurance,” Koehn said.

Historically, only a few markets have focused on patent insurance, Koehn says, but so far none have focused on the NPE exposure. Most look more at the transactional patent exposure. That cover offered protection if an insured is sued by a competitor for infringement, or if the insured needs to buy patent insurance due to a contract requirement. “That was more typically what they were looking to target,” Koehn said. “They would often even specifically exclude NPE litigation because of the high frequency of those types of lawsuits.”

According to Koehn, RPX is the only market that’s focused on the NPE issue.

RPX’s core business is not insurance; rather it serves as a publicly traded patent-risk-mitigation firm offering a subscription service where companies pay money to participate in RPX’s buying of patents and RPX’s collaborative defense work. Clients served by RPX include eBay, Google, Apple, Cisco, DirecTV, eHarmony and other big names.

“They’ve become almost a $300 million company off their subscription service and they’ve acquired close to a billion dollars in intellectual property assets,” Koehn says.

They’re like the opposite of a patent troll, he says.

“What RPX will do is they’ll take their members and pool them together and cut a deal on behalf of RPX membership and buy the intellectual property, or license it, and get rid of that intellectual property issue forever for their members. Then they share defense costs in the lawsuit and the case.”

While big companies like Google and Apple don’t need insurance for NPE litigation issues, there’s a larger market for companies that range from few million in revenues up to $1.5 billion in revenues, Koehn says. “If these companies were to get sued a number of times it could actually be a problem for them financially. That’s why RPX decided to develop an insurance product.”

Corona Underwriting, owned by wholesale broker CRC, is distributing the RPX product into the insurance broker segment. RPX will do marketing, underwriting and claims management services on behalf of a syndicate at Lloyd’s.

Fletcher’s company, IPISC, a Lloyd’s coverholder, also offers a patent troll policy, called Troll Defense Insurance, as well as other IP coverages for abatement, defense insurance, multi-peril IP, and unauthorized disclosure of confidential information.

The Troll Defense product provides the funds to help defend against charges of infringement, whether frivolous or not. Policy terms range from one to three years with limits ranging from $250,000 to $2 million. Co-pay is 20 percent with minimum self-insured retention at 2 percent of claim limits or 2 percent of revenue.

To Fletcher, it’s a market with opportunity. “The activity in patent litigation is continuing to increase, and as a result interest in insuring that asset, intangible property, or products of the mind, is growing,” he says.

While insurance buyers have not yet flooded the market, Fletcher, Newman and Koehn are betting on it.

“There’s huge latent demand, but what people have been told is there just isn’t a product available,” Newman says. “I think brokers have been looking around the market, but there’s three or four markets, globally, that write this cover. They’re very, very selective. Brokers are being forced to tell their clients that there isn’t a commercially viable option. I think a lot of clients have accepted that … they can’t insure it. We’re trying to change that perception.”

CFC recently launched a new IP coverage for small and medium sized companies. The new product covers the costs and potential damages in the defense or enforcement of an infringement action, as well as the potential loss of a right or a loss of profit. Where a right is lost through a dispute, the costs incurred in obtaining and maintaining the right can be recovered by the insurance. In the event that a company is unable to continue selling its product, the policy can also cover the loss of profit.

“We’ve been wanting to get into the stand-alone intellectual property market for a long time … It’s a huge issue for all of our clients,” Newman says. “We’ve got a lot of clients in the technology arena, in the life sciences arena, and they’ve been crying out for a product. It’s been so difficult to underwrite. We’ve been looking for the right people, the right team, to come across with the right experience, and a way of doing this where we can provide a good quality product, but also, make underwriting profit. We think we’ve found that solution.”

The CFC product doesn’t distinguish coverage based on who’s bringing the action.

“We write the cover on the basis that you’re covered in the event that you have an infringement claim brought against you,” he explains. “I think it’s a really important area of cover, and it’s one where the markets are different. There are some markets, at the moment that will just cover patent trolls. There’s some markets that exclude it. There are very, very few that will cover you for everything.”

Web Resource:
A video of CFC Underwriting’s Graeme Newman addressing IP exposures