An Overview of Intellectual Property Insurance Issues

Omid Safa and Daniel R. Belzil

The strategic importance and economic value of intellectual property (“IP”) can hardly be overstated in today’s global marketplace. Recognizing this, companies devote considerable time and resources to protect their vital IP assets and minimize the financial harm if/when problems arise. Evaluating the risks, understanding the insurance options available, and purchasing meaningful coverage that aligns with the needs of the business are critical pieces of the risk-management puzzle. Navigating the various options can be difficult. This article outlines some of the major issues.

Initially, policyholders have traditionally looked to their Commercial General Liability (“CGL”) policies to respond to IP disputes. Standard-form CGL policies typically cover “advertising injury” (sometimes called “personal and advertising injury”) which, depending on how these terms are defined in the policy, can cover some types of IP claims.

However, not all IP-related claims will fall within the “advertising injury” coverage in a CGL policy. To the contrary, policyholders have experienced mixed results due to varying definitions of “advertising injury,” various exclusions found in certain CGL policies, the particular facts of the claims, and the legal theories alleged.

For instance, copyright infringement, trademark infringement, service mark infringement, and trade dress infringement claims are often covered under a CGL policy’s “advertising injury” coverage (unless excluded). On the other hand, it may be more difficult to obtain coverage for unfair competition claims under the CGL policy’s “advertising injury” coverages unless these claims contain an allegation of “misappropriation of advertising ideas or style of doing business” or the “use of another’s advertising idea.” Similarly, a number of courts have limited the “advertising injury” coverage available for patent-infringement claims to those involving a process or invention that is itself an advertising idea.

Moreover, the proliferation of IP-related risks has prompted some insurers to revise their CGL policies in recent years to limit coverage for many IP claims that would be covered under traditional “advertising injury” coverages. Some now contain IP exclusions. As a result, a growing number of policyholders no longer rely solely on CGL policies and are instead purchasing IP-specific policies to address a broader array of IP-related risks than those covered by modern CGL policies.

For example, it is now possible to purchase “infringement liability policies” to cover third-party patent, trademark, copyright, or other infringement claims against the policyholder, or even, in some instances, against licensees, customers, and other entities with whom the insured has contractual IP indemnities. The coverages afforded by such policies vary widely. Some limit coverage to certain scheduled products and cover only those aspects of the products that fall within the scope of the insured’s own patents. Other policies may also provide for more modest defense protection (i.e., the duty to advance defense costs pending the resolution of the underlying case, rather than a true duty to defend) or disclaim coverage for defense costs entirely.

Companies who contemplate having to enforce their own intellectual property rights against potential infringers may purchase so-called “abatement” or “enforcement” coverages, either as a standalone policy or as part of another IP-specific policy. These types of policies are designed to provide coverage for initiating infringement claims, or even the costs of defending against counterclaims seeking to invalidate a policyholder’s patents, the costs of having the Patent Office reexamine the validity of the policyholder’s patent, and the costs to reissue the patent if necessary to strengthen the policyholder’s patent claim.

Likewise, various types of coverage now exist to protect against an insured’s own financial losses stemming from an intellectual property-related injury. These policies may indemnify a policyholder for its lost profits or loss of value caused by a covered event, which can include intellectual property infringement by third parties, invalidation of a policyholder’s intellectual property rights, injunctions, a lawsuit, or regulatory proceeding.

In addition to these IP-specific policies, there are three other types of policies available that may provide coverage for certain types of IP exposures arising from an organization’s e-commerce activities and business operations.

The first is media liability insurance. Media liability policies address the risks facing entities that are involved in creating or using non-patentable forms of intellectual property, such as media or entertainment companies. The policies generally cover liabilities stemming from the dissemination of the policyholder’s creative works and/or advertising for such works during the policy period. Moreover, they are usually “named peril” policies, meaning that they typically only cover certain causes of action, including one or more of the following: copyright infringement, misappropriation of ideas not subject to copyright, trademark infringement, breach of an implied contract relating to a third party’s submission of an idea or other creative material to the policyholder, defamation, trade libel, infliction of emotional distress, and violation of privacy rights.

Cyber liability insurance policies are another type of policy that generally focus on non-IP risks arising from data security breaches and privacy events. Nonetheless, “cyber-risk” policies can include coverage for multimedia liability (either as an extension or an endorsement) to provide coverage for the risks associated with a company’s activities when displaying, transmitting, and otherwise using protected content on the Internet. Depending on the particular terms (which can be the product of substantial negotiation), such extensions may provide coverage for a policyholder’s liability and defense costs arising out of claims alleging copyright infringement, misappropriation of ideas not subject to copyright, trademark infringement, breach of an implied contract relating to a third party’s submission of an idea or other creative material to the policyholder, defamation, trade libel, infliction of emotional distress, and violation of privacy rights. These policies, however, generally do not cover claims for patent infringement, false advertising, trade secret misappropriation, or breach of contract for failure to pay royalties.

Lastly, so-called “Technology Errors and Omissions (E & O)” policies may provide coverage for certain types of intellectual property risks. These policies are generally geared toward technology companies and insure against third-party liabilities arising from the provision of technology products and services, which can sometimes include coverage for copyright and patent infringement related to a company’s provision of technology.

Intellectual property transactional coverages are also available. Intellectual property rights are often a critical component of corporate transactions and companies acquiring such rights routinely demand representations and warranties concerning the validity, ownership, and status of such property. When those representations and warranties turn out to be incorrect, the financial consequences can be significant. Accordingly, a growing number of policyholders are purchasing specialty insurance covering the representations and warranties made during the transfer of intellectual property, including as a result of a corporate merger. Such policies can provide coverage for both first-party representations (e.g., that the seller has good title to the IP it is transferring) and third-party representations (e.g., that the seller is unaware of any infringing activity).

Finally, given the importance of intellectual property, an increasing number of policyholders have begun negotiating custom insurance policies to better address their exposures arising out such property. A company interested in exploring customized coverage should begin by assembling a cross-functional team with knowledge of the organization’s existing intellectual property assets, vulnerabilities, and insurance portfolio to perform a risk assessment to identify the current state of the company’s coverage, thoroughly evaluate its exposures, and develop a clear picture of the risks that need to be addressed. This team might include individuals from senior management, the intellectual property group, the in-house legal department, and risk management, as well as brokers and outside coverage counsel.

Senior management can provide insights into the strategic direction of the business and future opportunities, while the intellectual property and in-house legal department can use their subject matter expertise to identify the associated risks. Brokers and outside counsel can assist the risk management team in translating the risk assessment into the best available coverage. Brokers can help identify the current state of the market and coverage readily available. Outside insurance counsel can serve an important role in evaluating proposed policies, customizing the language, and ensuring that the final product satisfies the company’s requirements. Leveraging their knowledge of contract law, key interpretive principles, and coverage disputes, outside counsel can help purchasers avoid common pitfalls and customize the policy language with an eye toward enforceability and avoiding future litigation.