A Guide to Intellectual Property Insurance

IP rights breach provides cover for legal fees and damages arising when an insured is alleged to have infringed a third party’s intellectual property right. The allegation can occur regardless of whether the insured owns any intellectual property.  For example, where you’ve recently added a new functionality to an existing product and the functionality has alerted one of your competitors. The competitor alleges that the new functionality infringes upon their IP and are seeking compensation or to prevent you from selling the product via an injunction. In this scenario, the policy would cover the legal fees that are associated with defending the allegation of IP infringement and any associated liability damage award or settlement, as well as the defence of a subsequent counterclaim. We can also cover business interruption loss stemming from any resulting injunction.

IP Rights Challenge is coverage that allows an insured to defend any challenges to the validity or ownership of the insured’s own IP rights raised by third parties, as well as challenges to the title of the IP from employees or cooperation partners. So, one example would be if a third party challenges the validity of the insured’s IP seeking invalidation or revocation on the basis this is not novel or that prior art exists in order to be free to sell their products. Another example would be if an employee or past employee challenged the insured’s ownership of the right on the basis they were an originator or contributor to the right seeking compensation or amendment to the title. IP Rights Challenge coverage would cover the legal fees associated with defending any challenges to the title, validity or ownership of the insured’s own IP rights, as well as any settlement or any damages awarded by a court.

Contract breach covers an insured for contractual disputes brought against them for a breach of their obligations In relation to the IP terms of a contract. This could occur in the context of both in-licensing and out-licensing of IP. For example, a breach of non-disclosure or confidentiality agreements or an unlawful disclosure are right by the insured, or perhaps it may be a non-payment of royalties or milestone payments that are allegedly due in the case of a dispute. There could also be a breach of contractual terms that govern the exploitation of third party rights, such as geographical or technical fields of use. For instance, if the insured is selling a third party’s product in a territory they’re not licensed in. Finally, a failure by the insured to honour their IP related indemnity obligations or hold harm provisions could also result in a contractual dispute. Coverage for contract breach will cover the legal fees involved in defending allegations made against them, as well as any damages or settlements that may result from a breach of contract.

Contract indemnification tends to be one of the main drivers for purchasing IP insurance as it can help fulfil contractual obligations. It can create substantial exposure for a client, especially where there are multiple levels within the supply chain. It provides cover for the legal fees and associated damages when one of your indemnities is sued by a third party for alleged IP infringement or for their unauthorized use or wrongful possession of a third party’s trade secrets. An example of this could be where an insured supplies a customer with a component who then incorporates into their product. A third party sues that customer for IP infringement arising from the incorporation of that component supplied by the insured. As part of the contractual indemnification provisions, the insured is required to defend that customer against the allegation and potentially pay any damages or settlements. Contract indemnification would respond by reimbursing the insured for their legal costs, damages, or settlements that they’re contractually obligated to pay the customer and reimburse them for any subsequent counterclaim.

IP Rights Enforcement is a coverage that provides legal fees to an insured, allowing them to pursue legal action against a third party for the suspected infringement of their intellectual property. An example of this could be an organization who’s invested a lot of time, effort, and money into research and development of a new product, who then several years post-launch become aware of a third party utilizing similar technology that they believe infringes of their intellectual property. IP Rights Enforcement cover would first cover the investigation costs to determine the likelihood of third-party infringing the insured’s IP rights, and subsequently the legal fees involved in pursuing the third party for IP infringement.

Business interruption is a developing area of loss in the world of IP insurance. It has been designed to extend the scope of cover to protect businesses from the financial loss that they may suffer when they’re either injuncted from selling their products or services or have to stop utilizing certain processes. It can also apply where an insured suffers reduced or lost royalties when IP rights that they have licensed to others are invalidated. So, if a business were to be sued for infringing a third party’s IP, say patents, for example, and they were to lose the case, meaning their products are held to infringe, the third party’s patents, a court may grant an injunction preventing the continued use or sale of the infringing products. An example of this is where the United States International Trade Commission has issued orders preventing the importation of products into the US due to patent infringement, and we have seen similar cases in Europe. With business interruption coverage, the policy would cover the insured’s own loss of profits, so first party coverage resulting from an injunction or invalidation of rights that generate royalties from others.