When purchasing insurance, an insurance-buyer generally seeks to
protect him or herself against potential liabilities or risks of
loss. For example, many companies will purchase patent
liability insurance to offset the costs of defending against an
infringement claim. While such "defensive" patent
liability insurance is fairly common, a lesser known type of
"offensive" insurance is available to patent owners to
help offset the costs of enforcing a patent against an alleged
infringer.
So-called "patent enforcement" insurance is designed to
cover litigation costs (up to a specified amount) for enforcement
actions where the patent holder institutes a lawsuit based on
specific, scheduled patents (both U.S. and foreign).
Patent enforcement insurance is often seen as a blended risk
policy, meaning the policy has characteristics of both conventional
insurance and a bond. This means that the policy is true
insurance in, for example, the event that the plaintiff patent
owner loses the lawsuit, since the policy covers costs relating to
the action. If the policy holder wins the underlying lawsuit,
however, the policy acts as a bond insofar as the patentee has
received what is known as an "economic benefit," which
will likely be subject to an economic benefit payback
provision. If the company that owns the patent receives any
monetary settlement or award, it reimburses the insurer for its
pre-defined pro-rata share of those expenses up to the amount
contributed. The patent owner retains any additional
recovery. Once the patent holder repays the economic benefit,
the policy limits are reset and those funds are then available to
pursue other infringers.
Even where the prevailing patent holder does not receive a
monetary award, repaying the economic benefit may be
mandated. For example, in an action where the patentee fails
to prove infringement but benefits from an order upholding the
validity of its patent, the patentee has received a benefit.
The patent has a stronger presumption of validity going forward and
thus is more valuable than before it was litigated. Thus the
insurer may request reimbursement of a portion of the litigation
expenses it had previously paid that relate to efforts to uphold
the patent's validity. In this sense, the enforcement
policy contains provisions that are a hybrid of both traditional
insurance coverage and a bond.
The cost of the patent enforcement insurance is relatively high
compared to more traditional defensive insurance. Coverage is
usually available in the range of $250,000 to $10 million.
Premiums are calculated based on the number of patents insured
under the policy and their relative risk, with premiums ranging
from between 1-5% of the insured amount. Policies may also
contain deductibles and co-pays that must be covered by the
insured.
Before issuing a patent enforcement policy, underwriters normally
engage in a due diligence risk analysis of factors such as the
subject matter and number of patents insured, any products and/or
services covered, the potential litigation profile and other risk
factors which have bearing on the premium to be assessed.
Any company contemplating enforcement insurance should weigh the
costs of the insurance against the risk of engaging in costly
litigation trying to enforce a patent without coverage. While
typically more expensive than a defensive policy, enforcement
insurance may make sense for a patent holder needing funds up-front
to support a strong legal position at the beginning of negotiations
or litigation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.