|In the second part of a series on patent insurance, M Qaiser and P Mohan Chandran, intellectual property consultants, explain the specifics of patent insurance policies; their structure, coverage, special clauses and what companies need to do to qualify.|
"Whether or not a patent is actually infringed, it costs $3 million on average to defend a patent lawsuit," says US patent attorney Dan Ravicher. That is only in attorney's fees and associated expenses, not the damages the jury may award. These can sometimes knock the entire assets off a balance sheet. In today's business scenario, risk management is a key focus, and patent liability insurance is the only effective protection available for a product portfolio. This insurance can be the best shield in the hands of all those companies - big, medium, small or start-up - that have to fight infringement lawsuits.
Though these policies have been in the market since 1995, it is only recently that large numbers of companies are opting for them, with an increase in the number of patent lawsuits being filed. The number of patent infringement lawsuits filed annually in the US increased by a whopping 111 per cent between 1999 and 2000.
Most insurance companies offer policies that cover a part of the legal expenses as well as the damages awarded in infringement lawsuits. The American International Group (AIG) offers patent insurance with high liability limits ranging from $1 million to $10.5 million, but carries a minimum deductible of $50,000 per claim.
A minimum co-insurance participation of 10 per cent by the insured is necessary. The policy covers only patent insurance, but trademark and copyright infringement may also be covered on payment of extra premium. Intellectual Property Insurance Services Corporation (IPISC), USA, offers 'defense cost reimbursement insurance', with limits ranging from $250,000 to $5 million.
In India, no insurance company, either in the public or private sector, offers any type of patent insurance for patent-holders. C S Rao, chairman of the Insurance Regulatory Development Authority (IRDA), recently acknowledged that no insurance company in India has even applied for a patent insurance product.
The following issues are generally covered in patent infringement insurance:
- Defence expenses, including attorney fees, declaratory statements, injunctions and appeals.
- Damages, including judgments and settlements, previous lost royalties and previous profits, interest and costs, as well as legal expenses assessed by the court.
- Liability for the company, its subsidiaries, directors, officers, employees, all products and all patents - utility, process, and design.
- New acquisitions, previous acts, arbitration and dispute resolution procedure.
However, as with other kinds of insurance policies, patent insurance also comes with exclusions to ensure that a policy is taken and claimed only in good faith to prevent willful breaches. Some of the most common exclusions under patent insurance are:
- Willful infringement
- When infringement is already known or exists prior to the effective date of the policy
- Fines, penalties, judgments, double / triple / multiple infringement charges, exemplary fines or punishments, direct, indirect and / or consequential damages
The reason that patent insurance is offered in so few countries is because of factors such as a low understanding of the product, lack of knowledge, unavailability of insurance brokers, low indemnity, complex and expensive risk evaluation, geographic restrictions, etc. According to a survey of 14 EU countries published in January 2003 by CJA Consultants Ltd, the most active and influential IP insurance providers in the US were Aon, LRM, and IPISC.
In the European Union, Aon, Marsh, and Miller were the most active and influential IP brokers issuing patent insurance. The report revealed that insurance brokers in five countries - Germany, Belgium, Austria, Sweden, and the UK - had significant knowledge and experience of patent litigation. In the UK, brokers had global experience, as well as comprehensive and practical knowledge of various forms of patent litigation insurance. In Denmark and Finland, brokers had no experience of patent insurance, while Italy and Portugal evinced interest in patent insurance, even though they had no experience of it.
Some companies do not apply for patents because of a misconception that there is a huge cost and time delay involved in obtaining and protecting patents. On the contrary, the cost of applying and securing a patent is only a fraction of the cost of developing a new product. If the invention has financial viability, then it makes sense to apply for a patent.
Once the patent is granted, insuring the patent would be the next logical step as it reduces the financial burden of fighting any legal suits. An insured patent also discourages probable infringement, as the infringing firms would fear the financial strength of the patent holder, owing to the muscle power of the insurance company.
IPISC offers Enforcement Insurance policy with limits ranging from $100,000 to $5 million per claim. The policy, however, in most cases, reimburses only 80 per cent of the legal costs incurred within the policy limit. Some companies such as LRM, Lloyds, and Homestead have a clause referred to as 'economic benefit' or 'presumed economic benefit', which includes the ability to recover money advanced to the insured by the insurance company. The 'economic benefit' clause has two dimensions:
- When the insured wins a monetary award or settlement against a patent litigation, it will have to reimburse the insurance company on a proportionate basis till the entire money advanced by it is recovered. The insurance company can also recover an additional 25 per cent of the litigation costs advanced to the insured, after recovery of the full amount advanced.
- The clause allows the insurance company to recover the 'presumed economic benefit' from the insured. Presumed economic benefit would include instances such as the insured obtaining an injunction order against the infringer and preventing further infringement, settlement of a litigation by executing a licensing agreement, execution of a non-monetary commercial agreement between the insured and the infringer, as well as the infringer consenting to stop the infringement.
Premiums for patent insurance depend on the patent and / or the product being protected. They usually range between 2 to 5 per cent of the insured amount. The average premium ranges between $24,250 and $60,625 per annum, with the minimum premium at $20,000. The insurance coverage premium for a $1 million patent usually starts at $25,000.
The minimum premiums at IPSIC range from $2,500 for $250,000 (75:25 co-payment) to $7,500 for $1,000,000 (75:25 co-payment). This means that the value of the patent is $250,000 (or $1,000,000) and the insured value is also $250,000 (or $1,000,000). The insurer will insure up to 75 per cent of the value, while the remaining 25 per cent is to be paid by the insured. The premium can be paid annually or over a nine-month period, with a 20 per cent down payment.
Damages of up to $1 billion can be covered by insurance, but $20 to $30 million policies are most common. Insurance limits up to $15 million coverage per patent are available. Deductibles start at around $50,000 to $100,000, and include a co-insurance percentage after the deductible.
The co-payment can vary from 15 per cent to 25 per cent. IPISC offers co-insurance options of 90 / 10 per cent and 75 / 25 per cent. Defense expenses such as legal fees, declaratory statements, injunctions, and appeals are usually also covered by the policies. The factors that determine the premium rates are the past records of the firm, the care taken in patent research to prevent infringement, and the firm's own research and development work.
Before underwriting a company for patent insurance cover, certain documents have to be submitted to the insurance company. These include a fully completed application form, the company's existing financial statements (annual reports and Form 10-K), catalogues or brochures, a written and lucid description of the intellectual property risk management practices followed by the insured (including a list of the past litigation, if any), a comprehensive list of products manufactured, used, sold, distributed, and advertised by the insured.
Some companies, such as Litigation Risk Management Inc, get a financial evaluation and analysis of the insured amount by a big accounting firm like Deloitte and Touché LLP. Evaluation costs can go up to $25,000. Before finally providing the insurance coverage, insurance companies carefully consider the following aspects:
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- Past attempts at handling and enforcing patents
- Licensing programmes
- Profitability of the patented invention / product
- Ease of entry of the new product into the marketplace
- Litigation history of products in the class and sub-class of the new product
- Detailed patent claims of the insured's patented product
- Steps taken by the company to protect and monitor conflicting patents
- Existing and potential competitors in related markets
- Sales and market share of the top five companies in the market
- The known patents and patent-holders in a particular field
- The availability of capital resources for marketing a competitive / patented product
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