Intellectual Property Insurance: Dispelling the Myths and Misconceptions

Intellectual Property Insurance: Dispelling the Myths and Misconceptions
November 28, 2023 9 mins

Intellectual Property Insurance: Dispelling the Myths and Misconceptions

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In a landscape where IP is increasingly becoming integral to company valuations, many business leaders, boards, patent attorneys and litigation teams are making IP insurance a key asset in their toolkits.

Key Takeaways
  1. IP risk can be complicated and has increased in prevalence over recent years.
  2. Insuring against IP risk is no longer typically seen as a cover for sloppy or incomplete work.
  3. As threats continue to increase, more companies are insuring their risk, bringing costs down for others.

Misconceptions about intellectual property (IP) insurance occasionally overshadow its value to legal teams and in-house counsel. In the past, IP litigation insurance was often considered an unnecessary and costly overhead — the theory being that good work would preclude the need for insurance. These concerns were only further compounded by fears that companies would be giving up control of their options if they were forced to file a claim on IP insurance. Another fear was that policies wouldn’t respond to the very thing they were advertised to cover. However, the IP litigation insurance market has evolved considerably to address many of these concerns in several important ways.

What is IP Insurance?

IP risk is often more complicated than traditionally insured risks, such as property damage. This is due to the threat of being intentionally targeted by third parties. It is critical for companies to fully understand their exposures and implement risk management strategies to help safeguard their balance sheets from potential costly litigation.

IP insurance serves several different purposes and often covers a number of scenarios. From a third-party claim of infringement on a patent by a competitor or a non-practicing entity (NPE), which is commonly referred to as a patent troll, to a trademark or copyright infringement alleged against a brand or a piece of creative work, or a case of trade secret misappropriation, IP insurance can help protect companies from potentially catastrophic legal fees, settlements or damages awards.

As the IP litigation insurance market continues to evolve, dispelling existing stereotypes and myths will be an important first step to embrace the full scope of protection it can add to a robust patent management strategy.

Myth #1 — Needing Insurance Reflects Sloppy IP Work

While airtight legal work might prevent more IP claims than sloppy work, it is increasingly unlikely that IP professionals will be able to see around every corner and predict what threats may arise.

Quote icon

Many cybersecurity professionals once insisted that there was no threat they couldn’t foresee, and still ended up having issues. Nobody can predict what the next cyber attack will be, nor can they predict every possible intellectual property action.

Peter Holz
Senior Vice President and Head of Commercial IP Risk, North America

Put simply, the risks are too numerous and varied to be universally foreseen. According to a recent report, the percentage of cases filed by NPEs has steadily increased in the last five years. In the first half of 2023, just over half of cases were filed by NPEs, which is significantly higher than the proportion of NPE suits in the first half for the past 10 years.1 The rise in NPE activity indicates that the type of IP patent exposure is diversifying. This is further enhanced by the upward trend of cross-technology infringement claims, where companies in one industry sector are being sued by companies in a separate sector.

Additionally, there is the risk of frivolous assertion campaigns, either from competitors or NPEs, that can drive substantial legal fees just to defend a meritless case.

Predicting how exposures will change in the near- and long-term will only go so far in enabling companies to arm against litigation risks. IP litigation insurance is one of the core tools that can help protect balance sheets from unexpected litigation suits.

51%

of IP cases in the first half of the year were filed by NPEs.

Source: Aon’s proprietary review and Stanford Law School (2023)

Myth #2 — Having Insurance is Like Giving Away the Keys to Litigation

While it’s understandable that companies, especially those who derive a significant portion of their value from IP, are reluctant to surrender too much control to an insurer, IP insurance doesn’t mean a company has to relinquish control.

A company buying IP insurance can keep its options open in the event of a claim. Choice of counsel, coverage for appeals and counterclaims, and an annual claims-made reimbursement policy mean the company can help retain control of the process.

Myth #3 — IP Insurance is Too Expensive

To understand the cost of IP insurance, first consider the cost of litigation. IP litigation can be very expensive — defense expenses can easily exceed seven figures, and multi-million dollar settlements are common. However, the premium cost to insure against these catastrophic loss costs is often very attractive, and can become more so as the portfolio grows. For example, average rates for IP liability insurance have fallen by nearly 50 percent over the past five years according to Aon’s estimates. IP liability rates are now often below typical rates for other common financial lines insurance, including directors’ and officers’ liability and cyber liability.

The Case for IP Litigation Insurance is Set to Strengthen

The growing trend in IP litigation insurance appears to be following what happened with directors and officers (D&O) insurance. “At first, it was seen as a moral hazard — after all, why would anyone buy it if their executives weren’t hiding something? But as time wore on, that claim was debunked and D&O insurance became seen as more mainstream,” says Chris Rafferty, global specialty product leader of Aon’s Intellectual Property Solutions. In turn, as D&O insurance became more common, more companies became aware of its existence. It became clear that it wasn’t just for bad actors. Just as the dotcom bust of the early 2000s drove many to buy D&O insurance, the increase in activity from NPEs and the launch of the Unified Patent Court (UPC) in Europe have sparked increased interest in IP insurance.

This rising interest is especially true for technology companies. The industry continues to suffer the lion’s share of patent litigation, with parties that could be mapped to an industry representing 42 percent of suits in the first half of 2023, according to FactSet and Lex Machina data. As technology companies continue to dominate the economy, those numbers are expected to grow.

Regulatory activity in Europe and parts of Asia is also driving demand for IP liability insurance. In Europe, the new UPC regulation could amplify litigation losses across the entire continent, rather than being contained within one country. Since $100 million or more in damages awarded in the first half of 2023 surpassed any first half numbers of past nine years,2 the scope of IP litigation insurance protection for patent attorneys and litigators is growing rapidly.

Making Better Decisions with IP Insurance

IP litigation is only expected to increase in the coming years. No amount of due diligence can completely mitigate the risk on its own. More companies have recognized the need to help manage their IP litigation risk and have secured coverage. Brokers have also adapted the product over the past five to 10 years in an effort to better serve the market. IP litigation insurance is no longer a nice to have, but represents a key asset in patent attorneys’ and litigators toolkits. Working with a trusted advisor to manage this risk should be a priority for any IP-rich company.

Aon’s Thought Leaders
  • Peter Holz
    Senior Vice President and Head of Commercial IP Risk, North America
  • Will Kier
    Head of Aon’s IP Solutions Europe, Middle East and Africa
  • Chris Rafferty
    Global Specialty Product Leader, Intellectual Property Solutions, North America

1 Aon’s proprietary review and Stanford Law School (2023)
2 https://www.aon.com/en/insights/articles/evolving-ip-litigation-three-trends-to-watch-in-h2-2023

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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