Does your insurance policy cover your intellectual property?
There can often be a disconnect between a company’s management of its IP risks and its other risks. It is rare for risk managers to become involved in evaluating and managing risks related to a company’s IP portfolio, so questions as to whether those risks should be retained, transferred or insured (in whole or in part) are rarely considered.
Standard risk management opportunities for IP risks are limited but available. As a practical matter, it is difficult, if not impossible, to transfer the risks associated with a company’s ownership and use of intellectual property to a third party other than through an insurance arrangement. Until recently, however, IP insurance was rarely considered as a viable option because the premium was too expensive, the underwriting process was too time-consuming or the scope of coverage was inadequate.
Another reason that companies have not purchased IP insurance is the mistaken belief that general liability insurance affords coverage for IP risks and exposures. This confusion appears to stem from the fact that, in addition to bodily injury and property coverage, general liability policies provide coverage for personal and advertising injury, which may expressly include infringement of copyright, trade dress or slogan. However, to be afforded such coverage, the infringement must be in the company’s advertisement. Moreover, courts have repeatedly held that personal and advertising injury does not include either direct or induced patent infringement (see Heritage Mut Ins Co v Advanced Polymer Tech, Inc, 97 F Supp 2d 913, 924 (SD Ind 2000)). As one court recognised, it is “absurd to suggest” that a general liability policy “encompasses patent infringement or inducement to infringe” even where the policy covers personal and advertising injury (see Gencor Indus v Wausau Underwriters Ins Co, 857 F Supp 1560, 1564 (MD Fla 1994)). After all, “[s]ince the gravamen of patent infringement is the unauthorized production, use or sale of a patented product and not its advertisement, it could not arise out of or occur in the course of advertising activities.” (Atlantic Mut Ins Co v Brotech Corp, 857 F Supp 423, 429 (ED Pa 1994)).
As a result, companies which rely on their general liability policy or other standard insurance policies to manage their IP risks potentially have a significant gap in coverage. This article briefly summarises the primary types of non-IP insurance policies, which may afford some limited coverage for IP-related exposures and any gaps in coverage.
Commercial general liability insurance
Commercial general liability (CGL) insurance policies typically include coverage for personal and advertising injury, such as:
- “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, product or services;”
- “[t]he use of another’s advertising idea in your ‘advertisement;’” and
- “[i]nfringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’” However, consistent with the insuring provisions in CGL policies, the alleged infringing activity must be a result of the actual advertising itself. Further, given that most patent infringement claims relate to an insured’s unauthorised use or sale of a patented product (and the advertising thereof), it is unlikely that such claims would ever arise out of the insured’s advertisement. Accordingly, coverage for patent infringement is limited, if provided at all.
Another potential gap in coverage relates to the scope of covered damages under CGL policies. In a typical insurance agreement, the insurer agrees to pay those sums that the insured party becomes legally obligated to pay as damages because of personal and advertising injury. Although the term ‘damages’ is not defined, in certain jurisdictions, attorneys’ fees, punitive damages and disgorgement may not constitute damages. Moreover, it is highly unlikely that the amount that a company incurs as workaround cost would be considered ‘damages’ under a CGL policy. And yet, a third potential gap relates to an insured’s strategic decision – for example, to affirmatively prosecute its right to intellectual property. Most general liability policies do not afford coverage to an insured party for counterclaims or the insured party’s affirmative prosecution of claims against a third party.
Media liability insurance
Media liability insurance is a specialised type of errors and omissions liability coverage that is typically purchased by companies involved in media and entertainment activities, such as publishers, broadcasters and companies with significant marketing activities. These policies typically cover liability resulting from alleged defamation, disparagement, copyright infringement, plagiarism and other unauthorised use of material, names or trademarks.
Most of these policies utilise manuscript policy forms, and therefore the coverage can to some extent be tailored to the needs of the insured party. However, like CGL policies, a media liability policy will only cover specific types of IP claims arising out of the insured party’s business, which is defined in the policy.
Directors and officers liability policy
Most directors and officers (D&O) insurance policies cover not only claims against directors and officers, but also certain claims against the company. D&O policies issued to publicly held companies typically cover securities claims against the company, but do not cover any other type of claim. In contrast, D&O policies issued to privately held companies usually afford coverage for any type of claim against the company unless specifically excluded. However, these policies usually include a broad exclusion of any type of IP claim against the company, including claims related to alleged infringement of copyright, patent, trademark, trade name, trade dress or service mark, or alleged misappropriation of ideas or trade secrets.
Representations and warranties insurance
Representations and warranties (R&W) insurance policies often include coverage for breaches of representations in transaction agreements relating to IP matters. However, this coverage can be backward rather than forward looking and is also limited by the scope of a seller’s representation in the transaction agreement and by the survival period of that representation. Moreover, R&W insurance is only applicable in the M&A deal context and thus has a narrow applicability. In other words, R&W insurance is not available to a company unless, at a minimum, it involved the breach of a seller’s representation in an M&A deal. Even then, the liability limits apply to all breaches of representations and thus a R&W policy does not afford separate limits that were only applicable to breaches of IP representations.
Broadly, cyber insurance affords coverage for the risks associated with a company’s storing of data or information or conducting business through the Internet. Cyber insurance policies may afford limited coverage for certain types of IP-related claims if the alleged wrongdoing arises out of cyber-related incidents. For example, a cyber insurance policy may afford coverage for claims that a policy holder failed to properly safeguard a third-party’s intellectual property that was in its possession. Thus, costs or expenses that the policy holder incurs to determine the source or extent of a theft of a third-party’s intellectual property, as well as any damages arising from the theft of the third party’s intellectual property, could potentially be covered. However, cyber insurance policies do not afford coverage for allegations that the policy holder’s patents infringe upon those of a third party. Moreover, this coverage most often applies in the multimedia context and is similar in scope to some of the coverage afforded under a media liability policy.
Given the existing IP coverage gaps in common commercial insurance policies, the insurance market is now responding to these typical gaps in coverage for IP exposures – like it did for gaps in coverage for other unique exposures such as environmental and cyber insurance – by offering commercially viable IP policies tailored to the unique aspects of an insured’s IP risks. It is critical that the company work with a knowledgeable broker who is familiar with the IP insurance products on the market. It is also important that the risk managers themselves understand the scope of insurance that can be purchased under an IP insurance policy.