What is it?
A patent itself is a kind of insurance. The definition of a patent is an exclusive right granted by the government to make, use or sell the patented products. In other words, no one other than the patent-holder can manufacture or market the patented products.
Patent insurance has been around for many years on the international scene but not many businesses know about it. With more and more firms entering the knowledge-based business and fighting hard to safeguard their interests and achieve their business objectives, insuring one's intellectual assets have now become an imperative and vital strategic business decision.
Why do you need it?
Most companies, including well-established ones, may not want to use their gross profits to fight any Intellectual Property or Patent matters that may arise during the course of their business. Small to Medium Businesses, that have weaker cash flows, fear the idea of patent litigations. It can have a huge impact on their growth, affects their research and development, and ultimately on their turnover.
Some companies do not apply for patents because of the mistaken belief that it costs too much in money and time in obtaining and protecting the patents. On the contrary, the cost of applying and securing a patent is only a fraction of the cost of developing the new product. If the invention has financial viability, then it makes good sense to apply for a patent.
Once the patent is granted, insuring the patent should be the next step as it reduces the financial burden of fighting any legal suits. An insured patent also discourages probable infringement, as the infringing firms would fear the financial strength of the patent holder (due to the presence of a big insurance company) in fighting any legal battle.
How does it work?
It is Insurance that protects a patent holder against loss due to infringement of a patent. There are various forms including:
- Patent infringement liability insurance which is a form of professional liability insurance for manufacturers, users and sellers accused of infringing a patent holder's rights. Coverage is provided for defense and indemnity and can include profits and royalties that must be turned over to the patent holder. Coverage is written on a claims-made basis.
- Patent enforcement litigation Insurance for a holder of a patent against infringement by another person. Coverage is written on a claims-made basis and includes the cost of legal defense to enforce the patent. The policy includes a co-payment provision, usually 25%. Excluded are liability for compensatory or consequential damages, fines, punitive damages, exemplary damages, and multiple damages.
If new technology is patented by the company, they will benefit from the patent pursuance or enforcement insurance. If the patents are not held by the company, it is possible that some other company holds the patents, and therefore the company must have the patent litigation insurance, to mitigate the risk of possible infringement suits against the company.
Who Should Obtain Patent Insurance?
Patent insurance of both kinds (defence and offence) should be obtained by Businesses of all sizes – small, medium and large. Basically, if you have your own patents, you should have Patent Enforcement Insurance. If you don't have patents on your product line, it is recommended you have Patent infringement Liability Insurance.
Effective management of intellectual property basically involves creating, maintaining, and safeguarding its patent portfolio, apart from strategic planning of risk management. This requires constant vigilance for any infringement by competitors. The company also needs to be cautious in its research and development work while expanding its portfolio, so that it does not infringe on others' patents. According to American Intellectual Property Law Association, depending on the amount of infringement in question, the average cost of a patent litigation is $0.5 million to $5 million for both the plaintiff and defendant,. In some cases, the costs could also go as high as even $500 million.
For small and medium enterprises and firms entering a new business, it could be a question of survival as a single infringement case might impair their entire portfolio of products and services. The invisible costs may include the stress on the employees involved and also loss of many man-hours as they go about fighting an infringement or an allegation of infringement. The company's business and its image may also take a beating as customers and investors lose their confidence when a lawsuit is filed.
How much does the Insurance Cost?
Insurance companies carefully consider the following aspects of the insured company:
- Past attempts at handling and enforcing patents
- Licensing programmes
- Detailed patent claims of the insured's patented product
- Steps taken by the company to protect and monitor conflicting patents
- Existing and potential competitors in related markets
- Sales and market share of top five companies in the market
- The known patents and patent-holders in a particular field
- The availability of capital resources for marketing a competitive/patented product.
Premiums for patent insurance depend on the patent and/or the product being protected. The rates are usually between 2 to 5% of the insured amount. Damages can be covered up to $1 billion under the insurance, while $20-30 million are common. Insurance limits up to $15 million coverage per patent are available. Deductibles can start around $50,000 to $100,000 and include a co-insurance percentage after the deductible. The co-payment can vary from 15% to 25%. Defence expenses such as legal fees, declaratory statements, injunctions, and appeals are usually covered by the policies. The insurance coverage premiums for a $1 million patent start at $25,000 plus charges.
Who can help?
An Insurance Broker who specialises in this cover can find the right Insurer for you with the most appropriate policy wording. An insurance broker's role is to act as your representative and work in your interests, seeking the best cover at the best price for you with their skill, market knowledge and experience. Call a good one.
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