Insurers have traditionally steered clear of the risky business of protecting intangible assets. But not any more, says SAMiAN’s Sam Bobo.

In an increasingly competitive global marketplace, businesses are heavily reliant on intangible assets as a means of building value or revenue streams through licensing. Such is the worth of these assets, that companies holding valuable IP Rights often find themselves to be key targets for investment or takeover. But, as with any other asset, rights holders need to ensure that they are adequately protected against unforeseen perils. It’s important for small- and medium-sized enterprises (SMEs), in particular, to have the protection they need in order to pursue and enforce their IP Rights in the courts; however, without insurance to back them up, is it any wonder that they often have little choice but to back down when larger companies threaten to take infringement actions to the courts? This need for financial protection from a company’s own liability and the liability of others, has led to the growth of, and need for, IP insurance. However, to date, it has been a relatively small market for insurers. That all looks set to change.

The IP insurance market
Historically, the IP insurance market has been very niche and very poorly understood. Unsurprisingly, a lack of fundamental understanding of IP among IP brokers (and businesses as a whole), coupled with the difficulties of valuing it as an asset has curtailed the growth of this sector to date. Most insurance practitioners are poorly versed in the potential of IP and the risks associated with protecting such rights; similarly, little statistical information exists to underpin their underwriting criteria.

However, IP is a booming industry, and as IP professionals and increasingly patent offices are well aware, IP protection and enforcement is becoming ever more important when it comes to retaining marketshare in a competitive, knowledgebased global environment. Fortunately, this drive to better value and account for IP Rights is also playing positive dividends for the IP insurance market. And, as underwriting processes and methodologies and policy forms are improved and actuarial data becomes more widely available, IP insurance is expected to grow into a large, mainstream line of coverage. As a result, the IP insurance market is slowly evolving and becoming much more sophisticated in its approach to analysing risks attached to IP.

What is IP insurance?
From a traditional risk management perspective, IP risk can be categorised as both a first- and third-party risk.

First-party risk involves the need to insure against the asset holder’s own liability and costs. Common risks include: the legal costs of protecting and enforcing IP Rights and the loss or diminished value of an IP asset over time. Similarly, companies need protection against diminished licensing or product revenues, which may come as a result of legal findings of invalidity, unenforceability, or non infringement, or challenges to title or ownership. After all, if you base part of your business strategy on the existence of a core IP asset (such as a trademark right or the patent to a new type of technology), then you risk substantial harm to your bottom line, if that right turns out not to exist.

As companies become more aware of the risks associated with owning and protecting IP Rights, so too are they beginning to seek contractual indemnities from their suppliers.

Of course, companies would be wise not only to protect against any damage or liability associated with their own IP. Third-party risk is the need to insure against the liability of others. Here, the rights holder needs to be covered against any legal costs involved in defending against an IP infringement or theft suit, any resulting settlement or damages costs and costs involved in designing around the IP Rights or competitors, not to mention the harm to customer relationships and the negative impact on company share price that may occur when another company challenges your IP Rights or manages to prove that you are infringing one of their own rights.

A growing industry
Traditionally IP coverage has been limited to the provision of insurance against legal costs incurred in the protection and enforcement of IP Rights, as well as defence against infringement, including any resulting settlement or damages. However, this falls short of providing full-risk management solutions; recently, however, an underwriting agent has stepped in to plug this gap. When we launched SAMiAN Underwriting Agencies Limited there was a tangible gap in the insurance market: the industry just wasn’t providing adequate solutions or capacity for businesses facing increasing IP exposures. Of course, IP insurance should not be a company’s only IP risk management strategy; however, it can be a key IP risk management tool.

As companies become more aware of the risks associated with owning and protecting IP Rights, so too are they beginning to seek contractual indemnities from their suppliers. Such contractual obligations are fuelling growth for insurance as a means of risk transfer; particularly, where companies are likely to suffer an allegation of infringement themselves on  products they sell.

Insurance exists to protect against infringement liability, with the aim to protect businesses, particularly SMEs, against the potentially ruinous damages, settlements or defence costs involved in IP infringement liability actions. From  an assertion perspective, insurance also exists to help such companies to enforce their IP Rights; after all, few SMEs have the financial backing that they need to pursue big business in the courts, even if they know they have the IP Rights they need to enforce their claim. Similarly, SAMiAN also provides coverage for businesses involved in the sale or purchase of intangible assets. In this sector, in particular, it is important to provide security and peace of mind to those involved in mergers and acquisitions which derive value from the target company’s portfolio of assets.

But the market won’t just end here. Just as it is currently evolving to meet existing business needs in the marketplace, it also needs to grow alongside changes to the IP industry, as it itself grows and develops. This raises questions of the future growth of both industries: how is the IP industry set As companies become more aware of the risks associated with owning and protecting IP Rights, so too are they beginning to seek contractual indemnities from their suppliers. to develop and in which sectors, and how will this affect the provision of and need for IP insurance?

In my opinion, most growth in the industry is due to come in the field of first-party risk solutions. To date, minimal inroads have been made in this sector, but it is an area that needs to develop in order to meet growing corporate needs.

At SAMiAN, we have already established one particular need to provide cover for companies against potential for loss of revenue following say, a patent being invalidated or the loss of key revenue following the loss of a key IP license agreement. We are also seeing a growth in the provision of insurance as a means to securitise IP in lending transactions that are solely reliant on such IP; for example, in mergers or acquisitions.

Such areas are only set to grow in the coming years as businesses continue to recognise the value of IP assets as a core business asset. But this need for thorough IP enforcement on a global scale can be a costly and risky venture, if it is not also supported against unforeseen perils. IP insurance will help to provide this backing and the stability and security needed, not only to watch and protect against infringement, but also to have the necessary support to pursue infringers through the courts and to underwrite any infringement claims from third parties. Just as the IP industry is facing an exciting time of growth, so too is the IP insurance marketplace.


This article first appeared in IP Review, issue 21

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