Intellectual Property: The Unprotected Corporate Asset

A Risk Management Perspective

The global economy has undergone a remarkable transformation in recent decades. Driven by rapid and widespread digitalization, business operations are evolving. Where the value of a business once consisted of tangible assets of property, plant and equipment, it’s now heavily focused on intangible assets such as patents, copyrights and software. Today, intangibles, in the form of intellectual property (IP) and goodwill, comprise 90 percent of the value of the S&P 500¹. This value, however, is rarely reflected in an organization’s annual report and accounts.

Despite the growing importance of IP to the true corporate balance sheet, organizations continue to overlook the protection of their intangible assets, with only 17 percent of the value of intangible assets insured against potential loss². This risk management oversight stems from a lack of understanding about the business-critical role of intangible assets, such as IP.

For example, organizations wouldn’t put up a building and not insure it against fire, flood or wind, yet many businesses are spending millions on developing IP to support their products, services and, ultimately, their bottom line, but then not investing in insurance or risk transfer.

Growing Risk of Intellectual Property

A significant part of an organization’s intangible assets comes in the form of IP, which includes patents, trademarks, copyrights, domain names and trade secrets. Patent applications over the last few decades demonstrate the explosion in IP. It took more than a century for the U.S. Patent and Trademark Office to record its millionth patent, but just three years, from 2015 to 2018, to go from 9 million to 10 million. Given this increase, the problem for most organizations is twofold: How do they protect their own IP? And how do they protect themselves from allegations of IP infringement from third parties? Failure either way can lead to significant financial losses, business interruption and reputational damage.

Increased IP Leads to Increased IP Litigation

There were 4,404 patent suits filed in 2021, slightly (2%) more than were filed in 2020. This may not seem dramatic, especially compared to the 11% increase from 2019 to 2020; however, it is significant when put in the context of the period from 2015 to 2019. Over that period, there was a steady 10% decrease in lawsuits year over year. Since then, while there have been occasional short increases, there hasn’t been a two-year increase in patent litigation suits since before 2013³.

2021 had the third highest amount of damages awarded in the past 10 years, following only 2020 ($4.8 billion) and 2012 ($5 billion)⁴.

Managing the Risk

Given the increasing IP risk, many organizations are turning to insurance to manage their exposure. “It’s still a small percentage of businesses, but it is growing fast, doubling year over year,” says Ian Lewis, Global Head of IP Underwriting Solutions at Aon Underwriting Managers, with all sizes and types of business buying cover for different purposes. “Our largest client sees IP in the same way as they see cyber: a risk that they effectively self-insured and absorbed but have now realized that there is a maturing and competitive insurance market, which means they can take the risk off their balance sheet. Another banking client buys coverage to support their captive, which previously carried the risk in isolation.”

Smaller businesses benefit from IP insurance. It’s important to note that even the average patent litigation case can be expensive. Over the past ten years, when parties lose a case at trial, average damages have been $48 million and the median damages have been $2.6 million⁵.

Contractual Indemnity Exposure Trends

One significant area of increased liability has been the exposure of contractual indemnity provided to third parties.

Just a decade ago, organizations could negotiate away contractual indemnities in contracts around IP issues. Today, however, many businesses — especially those lower in the supply chain — are finding these to be non-negotiable, which puts them in the position of accepting risk that they really don’t want. As a result, they are either self-insuring the risk or they are entering contracts that require them to buy professional indemnity or general liability policies to cover IP risk, especially patent and trade secret issues. The irony is that most of these policies don’t offer that cover, leaving the IP exposure for the client and their supplier.

Growing and Maturing IP Insurance Market

With the growing need and demand for IP insurance, the insurance market is maturing.

Peter Holz, senior vice president and head of Commercial IP Risk at Aon IP Solutions, says that there is more than $250 million of capacity available for IP infringement liability exposures, and he sees this increasing over the coming years. “As the development of the IP insurance marketplace continues, the number and diversity of clients procuring coverage has been tremendous. Across the U.S., Canada, Asia-Pacific (APAC), Europe, Middle East and Africa (EMEA) regions, firms are purchasing coverage. In addition, this increased awareness, combined with enhanced underwriting analytics, has resulted in a broadening of coverage and lower premiums and retentions for many risks.”

A More Rigorous Approach to Intellectual Property Management

With the risk transfer options in place for intellectual property liability infringement claims and theft, every risk manager should be thinking about their organization’s IP risk alongside their more traditional property and casualty exposures.

“IP risk has the ability to move through the supply chain and be a big issue for companies small and large. In some instances, a business may see it as a legal risk that has been closed off when, often, it is still a potential exposure,” says Lewis. “But, by adopting a more rigorous approach to intellectual property management and working with their broker and insurer, a business can find ways of both reducing the risk of a potential IP infringement and protecting the balance sheet using tools such as intellectual property liability insurance.”