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Patent insurance: Brokers see growing market

Patent risk is an exposure every company faces, so it's only a matter of time before an infringement letter or lawsuit is received. (Photo: iStock)
Patent risk is an exposure every company faces, so it's only a matter of time before an infringement letter or lawsuit is received. (Photo: iStock)

After 35 years in the insurance business, Bill White is convinced that patent insurance is the next big thing.

White, a partner and leader of the venture capital group at Woodruff-Sawyer & Co., works with VC firms to design patent insurance programs that provide broad and cost-effective coverage for their portfolio companies. While these VC firms typically fund tech startups, White knows patent risk is an exposure every company faces — and it’s only a matter of time before an infringement letter or lawsuit is received. The rapid adoption of the coverage by these VCs, White says, will soon make patent insurance commonplace.

"Brokers and companies just need to understand the risk and their exposure to it, and then recognize that there are products available now that make sense," he says.

Over the past few months, we've introduced patent insurance as a concept and a product. We've discussed its importance as operational risk coverage. And we've provided tips on what to look for in a patent insurance provider. It’s time now to consider the invaluable perspectives of those in the trenches — the brokers who have an arm's-length view of the patent insurance market, their customers' needs and the role patent insurance plays in their business.

A growing market

While patent insurance still represents a small percentage of most brokers' business, it's a swiftly growing market compared with five years ago.

"I’m inundated with inquiries about patent insurance, so that's a good sign," says Kimberly Cauthorn, global IP practice leader at Willis Towers Watson.

Adam McDonough, executive vice president at Lockton Insurance Brokers, LLC, agrees. "I would say that it’s a fast-growing part of my business."

McDonough introduces the coverage to each client directly during meetings, phone calls — every opportunity he has. Patent litigation isn’t a new threat, he says, but the insurance products that mitigate it are better than ever. Insurers now also have more data on patent litigation’s losses, which can more closely project future losses.

"I had a client in the 1990s who bought a patent insurance policy," he recalls. "It was cumbersome, expensive and didn’t cover very much. The premiums were high and the coverage was restrictive. The underwriting process was painful and difficult."

These old ideas about patent insurance might linger and impede its adoption today. McDonough has the right idea: Brokers must emphasize to their customers that the policies and processes of the 1990s are not the policies and processes of today. Patent insurance has been transformed and improved by the availability of metadata and algorithms that deliver more nuanced and detailed risk profiles for individual companies. This results in customized policies that speak to each business' risk profile.

Education builds awareness

For many companies, patent risk is a key risk area — and one they’re often not even aware of. It's often up to the broker to point out these oversights.

"We usually talk to our clients about patent risk in the broader context of intellectual property risk," says Cauthorn. "What I’ve found is that risk managers assume the in-house legal folks are taking care of protecting against patent risk. Conversely, legal doesn’t know very much about insurance. There’s a disconnect that only comes to light when we get all the stakeholders together."

Brokers are also tasked with helping their customers look at the broader picture, not just the immediate and obvious threats. If a software vendor indemnifies all its customers, for example, its broker must understand the potential aggregation of risk. Suddenly, it’s not just the software vendor’s direct risk of being sued — it’s the indirect risk of their customers being sued and requesting indemnification.

While the technology sector immediately comes to mind as the most at-risk industry for patent suits, Karl Pedersen, a senior vice president within Marsh’s FINPRO practice, is quick to point out that patent risk exists in every industry.

"Day-to-day industry has just as strong an exposure as a technology company," he says. "The difference may be that the technology company is likely already aware of its potential infringement and has retained counsel to do an exploration of its exposure. A retail company, on the other hand, is likely unaware of any potential infringement, and has no structure in place for dealing with it."

A broker's 'fiduciary duty'

Many brokers believe they have a moral obligation to educate their clients about patent insurance.

"I see it as my fiduciary duty to make my clients aware of [patent insurance]," McDonough says. "I give them the opportunity to learn more about it and make a decision as to whether or not they want to pursue it. If I don’t do that, I’m failing them."

White, Cauthorn, McDonough and Pedersen all agree: Patent risk is a cost of doing business in the 21st century, and savvy companies will take appropriate measures to protect themselves.

"At the end of the day, we may not see the same spike in adoption of patent insurance as we did in cyber insurance, for example," says McDonough. "But don’t mistake patent insurance for a 'nice to have,' either. It's more of a 'should have’ for most businesses."

Paul Scola is head of Insurance Services at RPX Corporation. He can be reached at pscola@rpxcorp.com.

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