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The Importance of Intellectual Property Insurance for Innovative Companies

By October 18, 2023No Comments

Businesses regularly purchase insurance to protect their physical assets. Protecting business innovations can be just as important – possibly even more important in the long run. For innovative companies, intellectual property insurance is a logical way to safeguard intangible assets.

Understanding Intellectual Property (IP) Insurance

Intellectual property refers to various intangible assets that an individual or organization owns and that others cannot use without permission. There are different types of intellectual property:

  • A patent gives the owner the exclusive right to an invention. Utility patents cover processes, machines, articles of manufacture, and compositions of matter. Design patents cover ornamental designs for articles of manufacture. Plant patents cover new varieties of plants that can be reproduced asexually.
  • Copyright gives the owner the exclusive right to reproduce, distribute, display, perform, or create derivatives of a work, such as an image, song, article, or book.
  • A trademark gives owners the exclusive right to use a word, phrase, or symbol for their business, goods, or services.

Although businesses have the exclusive legal right to use their intellectual property, others may still use it without permission. When IP infringement occurs, businesses may have to pursue legal action to protect their intellectual property rights, recoup losses, and prevent further infringement. Businesses may also face lawsuits from companies alleging infringement of their intellectual property rights. Intellectual property insurance can provide protection in both scenarios.

Protecting Business Innovations with IP Insurance Benefits

You can think of intellectual property insurance as innovation insurance – it provides a financial safeguard for innovative companies. There are two basic types of coverage:

  1. Abatement enforcement coverage offsets the costs incurred when a policyholder needs to pursue legal action against a third party to protect the policyholder’s intellectual property, per the policy terms. Between legal fees and discovery costs, launching a successful lawsuit can be expensive, but IP insurance can help cover the costs. This allows companies to be proactive when protecting their intangible assets.
  2. Infringement defense insurance coverage offsets the costs associated with defending a lawsuit that alleges intellectual property infringement, per the policy terms. In some cases, allegations may be unfounded, or the infringement may be the result of an honest mistake or misunderstanding. Regardless, an expensive court battle may ensue. Infringement defense insurance provides important financial protection.

The Importance of IP Protection for Businesses

Legal protection for innovations is important for any innovative business – from biotech and software development companies to toy manufacturers and publishing houses. Consider the following scenarios:

  • Company A owns the design for a popular new kitchen gadget. Then Company B, a larger competitor, introduces a kitchen gadget with the same design. This causes Company A to miss revenue goals. Company A sends a cease-and-desist letter stating that it has a patent for the gadget, but Company B does not back down. Company A will have to file a lawsuit, which will be expensive.
  • Company A launches a new product. Then, Company B files a lawsuit claiming it owns the rights to one of the words used in the product’s name. Company A thinks the lawsuit is ridiculous – the trademark is for a common word, and Company B doesn’t even operate in the same industry. To prove it has the right to use the word, Company A will need to spend money on a legal defense. Otherwise, all the time and resources it put into marketing for the new product could go to waste.

What If Companies Skip This Innovation Safety Net?

Some businesses may not want to spend money on yet another insurance product. However, forgoing business asset protection is a risk. This is as true for intellectual property as it is for tangible property.

Copyright infringement lawsuits can be costly. For example, Business Insurance says Freeplay Music has filed a $17 million lawsuit against CNN over allegations that the news company used its songs without proper licensing.

When the infringer is a large company with deep pockets, launching a lawsuit may seem overwhelming. However, successful legal action is possible. For example, according to The Wrap, copyright claims against big Hollywood movies are common. Although they rarely result in settlements or judgements, a recent exception involved a lawsuit filed against Disney alleging that the Pirates of the Caribbean movies infringed on the plaintiffs’ copyright. This lawsuit did reach a settlement.

Without insurance coverage, a business may lack the funds necessary to launch a successful legal battle. This could mean the business fails to protect its intellectual property, putting the company’s revenue-earning capabilities in jeopardy. It could also leave the company vulnerable to a judgement or force it into a costly settlement, possibly bankrupting the company.

Don’t Underestimate the Importance of Innovation Insurance

In addition to the financial risk, companies may face reputational risk. Intellectual property is often closely associated with brand identity. For example, if another company that provides an inferior product or service uses a trademark that customers could confuse with yours, people may associate your brand with low quality. Likewise, if a company copies your patent for a product but cuts corners – resulting in a dangerous product that causes bodily harm – people may assume your product is also dangerous.

Although companies can often put a dollar amount on physical assets, it can be difficult to calculate the value of intellectual property. This does not mean IP has no monetary value. In fact, in many cases, IP assets may be the most valuable properties a company owns. Plus, your company’s financial stability may depend on protecting intellectual property.

Have questions?

Watkins Insurance Group can help you explore your intellectual property insurance options.