Intellectual Property Insurance: What CPAs Need to Know
CPAs are relied upon to provide exceptional services and consultation to their clients. Amid their ever-expanding roles, CPAs have a responsibility to provide timely and accurate advice to their clients. This advice should ensure appropriate steps have been taken to manage risks, protect assets and meet shareholder expectations. Conversations should include the very intellectual property rights that are protecting their clients’ assets. These intellectual property rights can be in the form of patents, trademarks, copyrights and trade secrets, which may be needlessly at risk if IP becomes involved in litigation. The inability to protect IP is a leading cause of failure for companies.
Virtually all companies possess intellectual property, which in many cases may be critical to their bottom line. Recent studies have found that up to 80 percent of a company’s value resides in its IP. Companies can no longer afford to ignore the importance of insuring this asset. Although companies are becoming better educated regarding the lack of true IP coverage in other policies, many companies are simply unaware that their commercial general liability policy may not be providing coverage for their most valuable asset, IP.
If a company’s IP becomes involved in litigation, specialized IP insurance policies are the only risk transfer tools which can ensure that the funds are available to pay legal expenses. Without specific IP insurance in place, companies are often left with less-than-favorable alternatives to cover the cost of litigation. These less-than-favorable alternatives include:
CGL policy coverage: CGL policies do not offer any meaningful IP coverage, since CGL policies are completely devoid of any IP enforcement coverage. The defensive coverage offered to an insured under a CGL policy is found in the “Advertising Injury” section of the policy, but is limited in scope. The accused infringing activity must be a direct result of the actual advertising itself.
Professional liability policies: These policies are designed to cover defects in design and performance, thus leaving a very narrow opportunity for the insured to secure defensive coverage for IP infringement.
Companies’ Credit and Working Capital Reserves
With litigation costs and damages reportedly in the millions of dollars, many companies may find themselves struggling to adequately fund IP litigation. Thus, it is wise for companies to evaluate their borrowing capacity. The only alternative may be accessing working capital reserves. Obtaining insurance specific to this exposure leaves working capital to be used to grow, capture market share, and maintain profitability, which is always in their best interest. Then if a company finds itself in court, as a plaintiff or a defendant, the funds are available to thoroughly and vigorously litigate. Needless to say, the lack of IP insurance could lead to the company losing its IP rights, incurring burdensome royalty payments under licensing agreements, being forced to settle, or going out of business.
Companies that are more successful or have more innovative IP are more likely to be involved, either offensively or defensively, in an IP lawsuit. According to the American Intellectual Property Law Association’s most recent survey, the average litigation expense incurred by each side (plaintiff and defendant) through trial is $3.1 million, when the amount in controversy is between $1 million and $25 million. This number does not include damages, which could easily reach several millions of dollars.
Consider the following IP insurance policies which are available to help manage a company’s IP risk:
Defense insurance: Defense insurance reimburses the litigation expenses to defend against charges of infringing another’s IP rights by the products or services that are being sold, and may be purchased to cover potential damages or settlements as well.
Enforcement insurance: Enforcement insurance is a unique plaintiff’s policy, which reimburses the litigation expenses to enforce IP against alleged infringers.
Unauthorized disclosure insurance: Unauthorized disclosure insurance reimburses the litigation expenses to defend against charges of the unauthorized or unintentional disclosure of a third party’s entrusted confidential information.
Multi-peril insurance: Multi-peril is first-party coverage for a decrease in value of the insured’s assets resulting from losing IP litigation. It reimburses money directly to the policyholder beyond the legal costs and damages (awards) of the underlying case.
Greg Sater, a nationally renowned IP attorney with Rutter & Hobbs in Los Angeles, recognizes the value of holding an IP insurance policy, and is a vocal supporter of IP insurance. Sater recently represented a small startup company against a larger infringer with much deeper pockets than his client’s. Sater explained, “There is no doubt that I could not have achieved the result I achieved for my client in that case if my client had not purchased IP insurance. The insurance was outcome determinative.”
Sater further noted the difference that IP insurance made: “That case was the prototypical case in which the little guy normally would lose, or be forced to give up the fight early, even if he’s in the right, because he just can’t afford the legal fees and costs of a full-blown IP infringement lawsuit; and, looking at him, the other side knows it too. The infringement enforcement insurance that my client obtained was a game-changer in the case. It leveled the playing field. It was like getting an injection of adrenaline just at the right time!”
If a client’s IP gets challenged in court, as a plaintiff or a defendant, their IP may very well be in jeopardy if funds are not available to thoroughly and vigorously litigate. Thus, it is wise for CPAs to consider their client’s ability to fund IP litigation. As trusted advisors, CPAs can demonstrate that they have the best interest of the client in mind by ensuring the client’s ability to protect their IP assets. CPAs can also help their clients develop strategic IP plans, realize better ways to monetize assets, improve companies’ statements of financial position, and boost shareholder confidence.
Surprisingly, despite the established availability of these policies, many CPAs are unaware that IP insurance exists. Equally surprising is the number of CPAs who assume their clients are covered for IP risk under their CGL policy. IP insurance ensures that companies have the money available to maximize their chances to win on the merits of the case. More importantly, companies will be better equipped to protect their IP, which is their competitive advantage. It is important to discuss IP insurance with an insurance professional who specializes in intellectual property insurance.