Protecting your ideas: The ins and outs of intellectual property insurance
These days it’s possible to insure far more than just your car, home, life and health. You can buy protection for everything from cellphones to pets. So why not consider buying insurance for your ideas?
The technical term is intellectual property insurance, and it’s designed to protect companies and individuals against the risk of infringement on copyrights, trademarks or patents.
This type of insurance is a great idea for everyone from owners of small businesses to inventors who have intellectual property to protect, says Andrew Schrage, insurance expert at personal finance website MoneyCrashers.com.
“If there’s even a chance you could be sued over intellectual property — or even if you may have the need to sue someone else over an intellectual property matter — this type of insurance is a wise purchase,” Schrage says.
According to the World Intellectual Property Organization, a U.N. agency dedicated to the use and protection of intellectual property, the term intellectual property (IP) refers to “creations of the mind.” The definition includes inventions, literary and artistic works. and symbols, names, images and designs used in conducting business.
IP is divided into two categories:
1. Industrial property, which includes inventions (patents), trademarks and industrial designs.
2. Copyright, which includes literary and artistic works such as novels, films, music and artistic works, like paintings, photographs and sculptures.
The first protects you if a company or person sues you for intellectual property infringement – for either industrial property or copyright. For instance, if you’re accused of plagiarizing a work of fiction, IP insurance would help pay for legal fees to defend yourself against the allegations, as well as any monetary damages you may have to pay if you’re found guilty of infringement.
The second type of IP insurance is called a pursuit policy. It helps pay legal expenses you might rack up if you have to sue someone for infringement of your IP.
“Whether you’re the one being sued or the one doing the suing, IP legal battles are very expensive,” says Schrage, citing several studies that show average IP litigation costs are between $50,000 and $3 million per case. “It’s one thing that’s consistent across the board, and this type of insurance is a nice buffer against that.”
Who should buy it?
Karrie Lewis, marketing director at Intellectual Property Insurance Services Corp., an IP insurance agency, says owners of large and small businesses should consider IP insurance.
“Almost every company that is making, using, importing or selling goods or services has the potential to become involved in an IP lawsuit,” Lewis says. “Most often, IP lawsuits involve a big guy going after a small guy, and they’re designed to put the smaller guy out of business and allow the bigger company to continue to gain or maintain a larger slice of the market. Most small companies are defenseless against these types of unwarranted, aggressive tactics.”
For instance, Lewis cites a patent infringement case that was settled after four years in court. It involved Icon Health & Fitness suing a much smaller company, Octane Fitness, both of which design and manufacture exercise equipment.
For six years, Octane sold a successful high-end elliptical machine for fitness centers. Icon, which sold a similar elliptical machine, sued Octane for patent infringement of a specific part design, but Icon’s underlying intentions were found to be questionable. Internal emails uncovered by lawyers revealed that Icon was going after the smaller company to siphon royalties from Octane.
In the end, Octane won the case. But the company was saddled with a $1.7 million legal bill when all was said and done. Without IP insurance, Octane never would have had enough money to defend the suit.
What does it cost?
Lewis says the cost of IP insurance depends on how much you want to insure.
For instance, defense-only policies typically are best suited for companies with annual revenue ranging from $500,000 to $25 million. Under this scenario, the premium would be $2,500 to $3,500.
Defense and indemnity policies, on the other hand, are generally designed for larger companies with annual revenue surpassing $50 million. Annual premiums for defense and indemnity policies can be between $3,000 and $20,000.
At Intellectual Property Insurance Services, premiums also depend on the policy term, with most being either one year or three years, and annual premiums between 2 percent and 5 percent of the policy’s limit. So, for instance, if you wanted to protect yourself against $1 million in IP litigation fees, you’d spend between $20,000 and $50,000 a year on insurance.
“Assessing a company’s or individual’s IP risk and ensuring they have the right protection in place for this potentially costly exposure is essential to overall financial survival,” Lewis says. “The inability to protect IP is a leading cause of failure for companies, which can easily be avoided through specialized IP insurance products and services.”